Weak Employment and Inflation Report Pushes Cable Through Support

Cable tumbled to a fresh two-month lows on the BoE Inflation Report, which revised down its household earnings forecasts while stating that it will now place more weight on wages in its assessment of spare capacity in the labor market. This confirms that a rate hike by year-end is all but off the table now. Cable has made a low of 1.6708. The Inflation Report followed the June-July labor market report, which showed average household incomes to have dipped to -0.2% y/y in the three months to June, the first negative reading since 2009

The BoE revised down its household earnings forecast in its Inflation Report while stating that it will now place more weight on wages in its assessment of spare capacity in the labor market. The central bank revised annual earnings growth of households for Q4 down to 1.25% from 2.50%. The BoE also sharply cut its estimate of the equilibrium unemployment rate to 5.5% from 6.25%. At the same time, the BoE revised down its estimate of spare capacity, to roughly 1% of GDP, down from around 1.25% in the two previous Inflation Reports in February and May, but stressed that that it wants slack to be largely used up before it raises interest rates.

The Report has driven both sterling and U.K. yields lower as it confirms that a rate hike by year-end is all but off the table now. The BoE revised its 2014 GDP forecast up to 3.5% from 3.4%. It forecast CPI, currently 1.9 percent, to be around 1.8% at the two-year forecast horizon.
Short-term support was breached and the next level of target support is seen near 1.6680.

Resistance on the currency pair is seen near the 10-day moving average at 1.6820. Momentum remains negative with the MACD (moving average convergence divergence) index printing in negative territory with a downward sloping trajectory.