GBP Pounded by Inflation Report

The greenback relinquished some of its recent gains against the majors, slipping to 108.39 against the yen and 1.4978 versus the euro. Nonetheless, the dollar continues to benefit from the sharp retreat in oil and commodities prices. In the coming session, traders will look ahead to retail sales for July, which are expected to fall by 0.1% reversing the 0.1% increase a month earlier while the excluding automobiles reading is seen lower at 0.5% from 0.8%.

Sterling Pounded by Inflation Report

The pounded fell sharply following the release of the Bank of England’s inflation report, selling off to its lowest level since November 2006 at 1.8867. Further, UK futures markets immediately priced in a 60% probability for a December BoE rate cut, versus a 10% chance prior to the release. The Bank’s inflation report highlighted the growing risks for a possible recession, stating that risks to GDP are on the downside, with the slowdown sharper than seen in May. While it added that inflation risk remains to the upside, it expects CPI to be below the 2% target in two years if interest rates hold steady at 5%. As such, the next rate move by the Bank of England will more likely be a cut rather than a hike in order to jumpstart the lackluster UK economy.

The jobs report from the UK released earlier bodes poorly for the economy with the unemployment claimant count shooting up to its highest level in 15-years at 20.1k in July versus an upwardly revised 20k reading from June. The ILO unemployment rate also rose by more than expected at 5.4% in June, up from 5.2% a month earlier.

Yen Advances Despite Data

The yen recovered against the majors, rising to 108.39 versus the dollar and 161.62 against the euro. However, data released earlier in the Tokyo session revealed a larger than anticipated contraction in economic growth as Q2 GDP fell by 2.4% compared with 4.0% growth a year earlier and down 0.6% versus 1.0% growth in the previous quarter. The report reinforces sentiment expressed by government officials last week, raising fears that a recession may be looming for Japan.

Amid widespread losses in the global equity bourses, traders unwound the carry trades – prompting the euro/yen pair to sell-off to its lowest level since May 13th at 161.62. EURJPY has since recovered back above the 162-handle with interim resistance seen at 163, followed by 163.30 and 163.75. Additional ceilings will emerge at 164, backed by 164.40 and 164.80. On the downside, support begins at 162.20, followed by 162 and 161.60. Subsequent floors are eyed at 161.30, followed by 161 and 160.50.