MARKET COMMENT: Pound Rallies To 10-Day High As BoE Boost UK Growth Forecasts

LONDON (Alliance News) - UK stocks indices have closed flat Wednesday at the end of a relatively subdued session for equities. Meanwhile the pound made its strongest gains of the year against both the dollar and the euro after the Bank of England increased its economic growth forecasts for UK.

The FTSE 100 has closed fractionally higher at 6,675.03, the FTSE 250 has closed flat at 16,079.18, and the AIM All-Share has closed up 0.3% at 870.68.

Major European markets had a slightly better day, with the CAC40 closing up 0.5% and the DAX 30 closing up 0.7%.

After the close of European markets, stocks on Wall Street are mixed. The DJIA is down 0.3%, the S&P 500 is down 0.2%, and the Nasdaq Composite is up 0.1%.

Mark Carney announced Wednesday that the BoE now expects the UK economy to grow at 3.4% in 2014, up from the 2.8% it expected previously. While acknowledging that the recent above-trend growth in the UK is encouraging, the Governor said that it is still far too soon to be considering an interest rate rise as he, "will not take risks with the economic recovery."

Carney announced a change to the bank's forward guidance policy, moving away from using the single threshold of a 7.0% unemployment rate. Going forward, the bank will assess the need to raise interest rates on a broad range of indicators - eighteen no less - with a particular focus on using up the spare capacity in the economy.

Following the criticism of forward guidance since its introduction six months ago, the BoE now seems to be shying away from specifics, but did say that it would not raise rates while there is spare capacity in the economy, which could exist for 2-3 years. It said that when it does raise rates, the changes will be gradual, and that it will hold on to its GBP375 billion stock of asset purchases until the first rise of rates.

"Overall, forward guidance has moved from a simple thing to something far more nuanced and the BoE may not raise rates until it feels in its gut that rates need to be increased, and markets are notoriously bad at reading a central bank?s gut feeling," says Forex.com research director Kathleen Brooks.

Carney warned that the strength of the pound, which has already been seen to have a negative impact on overseas corporate earnings, will make exports more expensive and put a break on the strong economic growth.

Even so, the pound rose sharply on the back of the improved growth outlook and continued to gain in afternoon trade, recording a 10-day high against the dollar of USD1.6588.

"The market's response is going to frustrate officials," says head of currency trading at Brown Brothers Harrimen, Marc Chandler. "The bottom line is that while the general view remains of a risk of a BoE rate hike in the first-quarter 2015, many observers and investors see heightened risk of an earlier hike, as in late 2014."

The euro was the worst performer of the currency majors Wednesday, falling half a cent against the dollar to low of USD1.3559 after comments from an executive board member of the European Central Bank. Benoit Coeure said the bank is considering a negative deposit rate very seriously.

The comments came after the release of weaker-than-expected Eurozone industrial production numbers. Production grew by just 0.5% in December, slowing from a negatively revised 2.8% in November. Economists had expected growth to slow to 1.8%.

The double-whammy of an independently strong pound and a weak euro caused the biggest move of the year in the cross between the two. The pound gained almost 1.5 cents against the euro, reaching an 8-day high of EUR1.2206.

It was a quieter session for equities, with indices struggling for momentum in either direction. Food & Drug Retail was the top gaining sector, led higher by Morrison in early trade on speculation of interest in the retailer going private. According to Bloomberg Business Week, the founding family of the supermarket chain has contacted private-equity funds such as CVC Capital with respect to a privatisation. The stock opened as the top FTSE 100 gainer on the news but ultimately closed just 0.3% higher.

All stocks in the sector made gains however, with Morrison partner Ocado up 3.2%, and Tesco up 1.5%. Booker group closed up 1.3% after having its price target raised by Berenberg, and UDG Healthcare closed up 3.1% after saying it has agreed the sale of its unlicensed medicines business for GBP23.5 million.

Tullow Oil was the heaviest faller in the FTSE 100, closing down 6.3% after saying its pretax profit fell 72% in 2013 due to lower disposal gains and higher exploration charges.

Software & Computer Services stocks lead the fallers Wednesday. TeleCity Group dragged the sector lower and weighed on the FTSE 250 index. The data-centre company closed down 9.6% after it raised its dividend, but disappointed investors by announcing 2014 guidance lower than analyst forecasts. Within the sector, Sage Group and Fidessa Group also closed lower, down 2.0% and 1.8%, respectively.

Precious metals have continued a recent display of strength, with the gold price receiving an extra boost at the mention of possible negative interest rates in Europe. Having risen for the last four days, gold now trades at USD1,293.25 per ounce. Silver trades at USD20.30 per ounce.

A busy day in the US corporate calendar Thursday brings full-year results from Lloyds Banking Group, Rolls-Royce, Shire AMEC and Rio-Tinto. Interim statements are also due from Imperial Tobacco Group and Tate & Lyle.

There are no UK releases in the the economic calendar Thursday. A different central bank will be in focus, with the ECB delivering its monthly report at 0900 GMT. German CPI Inflation data is also due at 0700 GMT. CPI is expected to have slipped into negative territory month-on-month to record a drop of 0.6%.

In the afternoon, US initial jobless claims and retail sales data is due. Janet Yellen will also deliver the second part of her testimony to the Senate Banking Committee at 1500 GMT.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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