Mark Carney, the governor of the central bank in the UK, rattled markets when he delivered the bank’s quarterly inflation report and insisted that policymakers are no closer to raising rates than they were in February. Carney said that there continues to be sufficient slack in the economy to warrant low interest rates and when that changes, only very gradual moves will be made. He reminded markets that the policymakers look to a variety of factors in order to determine the health of the economy instead of just the rate of unemployment, which had previously been the case. That reminder was appropriate given that the rate of unemployment fell to five-year lows. But disappointing the rate of earnings came in above the rate of inflation, meaning real wage growth remains negative. The combination of a dovish central bank and weak wage data helped to take sterling back off its recent highs. Sterling is at three-week lows against the US dollar and back near one-week lows against the euro.
US dollar
The US dollar has little changed against the euro, but made up some ground against sterling. Producer price data release showed a surprise gain, which was viewed as slightly supportive for the currency. The gain in pipeline price pressures was the largest in one-and-a-half years, even core inflation, which strips out volatile food and energy prices, rose 0.5 per cent. Traditionally producer prices are seen as leading indicators for consumer prices. Consumer prices remain extremely benign with no signs of feed through from higher producer prices yet. Industrial output, weekly jobless claims and a regional manufacturing survey will also be released and signs that the economic recovery continues should prove to be supportive for the US dollar.
Euro
The single currency saw small gains when the industrial output figures did not come in below forecast. However, the preliminary estimate for France’s GDP came in at 0.0 per cent quarter on quarter and Germany’s flash release stood at 0.8 per cent quarter on quarter for Q1. The data shows the growing gap between the two economies and the difficulties policymakers will have when trying to choose what sort of monetary policy is required. Germany’s rate of growth was higher than forecast, while France’s fell short of expectations.