Bank of England set to downgrade growth and inflation forecasts
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
If yesterday?s UK economic data told us anything it is that the road to recovery is likely to be a long and arduous one. Even though manufacturing and industrial production declined by less than expected in June it was clear two weeks ago from the awful Q2 GDP numbers that the UK economy wasn?t going to see much in the way of growth in 2012 and would struggle to meet the growth targets laid out, not only by the Office for Budget Responsibility, but the Bank of England as well.
This morning?s latest Bank of England inflation report is likely to see the bank take the scissors once again to its growth forecasts with expectations that it will cut its 2012 prediction yet again from the current 0.8%, to a level near to the IMF estimate of 0.2%. They are unlikely to go as far as the OECD who has predicted that the UK economy will contract in 2012.
The central bank is likely to blame the effects of events in Europe as one of the key drags on the economy, as well as the extra bank holiday in June for the particularly poor performance in Q2.
Extra bank holidays are always used as a convenient excuse by economists and politicians to justify poor economic performance, however this seems lazy. Large parts of the UK take extended leaves of absence at the end of every year due to Christmas and New Year yet no-one talks about the negative effect that has on the UK economy in Q4 every single year.
The Bank of England is also expected to cut its inflation forecast as well with the CPI index expected to fall back below 2% by the end of the year. They will paint that as a good thing, which it would be if it pans out like that, however given the bank?s track record on inflation over the past five years its hard to set too much store by it, given that the recent fall back in inflation in Q2 was due in large part to the sudden fall in oil prices through March to June, by about 20% in sterling terms.
Since those June lows the oil price has rebounded by over half that decline so we could well find that the recent dip in inflation could well be as good as it gets, especially when viewed in conjunction with the recent sharp rises in global food prices, due to weather related issues.
In Europe the debt crisis appears to be rumbling along with still no end in sight with ratings agency S&P reducing Greece to a negative outlook last night, on the basis that the country is likely to need additional financing this year. Given that the country is already on the lowest possible rating, it begs the question, why bother, especially as economic activity elsewhere in Europe is also plunging sharply.
Yesterday we saw German factory orders for June plunge much more than expected, by 1.7%, and today?s industrial production data for June is also likely to show similar tendencies, with expectations of a 0.8% decline. Spanish industrial production for June is also expected to show similar weakness with a year on year decline of 6.2%.
It is becoming abundantly clear that EU leaders have no coherent strategy for growth, apparently content to bicker amongst themselves about bailouts and austerity and become increasingly reliant on the prospect of possible ECB measures to try and alleviate the pressure in peripheral bond markets. How else can the current rise in European equity markets be otherwise explained, given that recent economic data across Europe over the past two weeks has been nothing short of woeful yet European markets are up over 10%.
EURUSD ? the 55 day MA in the 1.2430/40 area continues to cap further gains for the single currency which makes it susceptible to pullbacks in the short term. A break here targets a move to the 1.2600 area and trend line resistance from the 21st May high at 1.2825.
The bullish weekly candle from two weeks ago seems to be gearing the market up for a euro rally.
It would take a move back below the1.2220/30 area, to undermine that scenario and retarget the 1.2150 area.
The key level on a monthly close remains the 200 month MA at 1.2060, the July lows.
GBPUSD ? upside remains limited while below the 200 day MA and resistance between 1.5740/80. Above here and we could see a move to 1.5910.
Key support remains at the trend line support at 1.5470 from the 1.5270 lows and any push lower needs to hold to prevent a move back to 1.5270.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? the single currency has so far failed to push beyond the 55 day MA at 0.7975 and trend line resistance at the same level from the February highs at 0.8505. While below this level the downside trend remains intact and we would need to see a push back below the 0.7880 area to retarget the 0.7820 area.
USDJPY ? the US dollar remains becalmed between support below 78.00, and resistance above 79.30.
The cloud support at 77.30 and the May lows at 77.60 remaining a key level. As long as this holds the downside, the risk of a rebound remains quite high.
A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.
Equity market calls
FTSE100 is expected to open 42 points lower at 5,799
DAX is expected to open 8 points lower at 6,960
CAC40 is expected to open 4 points lower at 3,449
FTSEMib is expected to open 5 points lower at 14,661