Carney signals tighter monetary policy

Yesterday’s Bank of England Monetary Policy Committee meeting had been billed as being one of the more standard meetings. It was expected that a 9-0 vote and a press conference chaired by Governor Carney at which he would comment on the outlook for inflation and the Bank’s preparations for a no-deal Brexit would be the extent of the proceedings.

The markets complacency was shattered as Carney was more bullish about the economy and more hawkish on interest rates than he has been for some time. Of course, his words carried the standard Brexit caveat, but a market already prepared to buy Sterling following two possible breakthroughs in the Government’s dealings with Brussels was caught a little unawares and short positions were liquidated.

It seems traders are still of the opinion however that a hard or no-deal Brexit is a likely outcome from the negotiations. There has been no follow through or comment from Brussels about either a deal on Financial Services or the possibility of a divorce agreement being completed by November 21st. While short positions have been liquidated, there is no sign that the market is prepared to be long of the pound with continued uncertainty over the terms of any deal.

The pound reached a high of 1.3036 versus the dollar yesterday following its second largest rally of 2018 and settled back a little to close at 1.3005.

Considering your next transfer? Log in to compare live quotes today.

Euro rallies despite continuing concerns

The euro rallied yesterday reaching a high of 1.1425 versus the dollar as the greenback’s correction continued. Given the severe headwinds that are facing the single currency, it is unlikely that this rally will continue for long. As the clock continues to tick down on the three-week ultimatum facing Italy to amend its 2019 budget, lowering the deficit from 2.4%, closer to the previous Government’s pledge of 0.8%, there is a concern amongst traders that the problem could spread.

It seems that Italian Prime Minister Giuseppe Conti and his two radical deputies have no intention of complying with the EU Commission and instructing the Economy Minister to make any changes to the budget. Conti has labelled criticism of the budget “an attack not on his Government but the Italian people”.

The Nationalist Government in Rome wants to end austerity which it believes has been unfairly tough on Italians by lowering taxes and raising welfare payments.

The threat to the entire EU is clear and while Rome continues to prepare for conflict, Brussels needs to tread carefully since it is unlikely to get what it wants regarding a reduction in either the budget deficit, or the debt to GDP ratio which currently stands at close to 138%. Brussels cannot allow the growth and stability pact to be so blatantly ignored but neither can it afford to push Italy into such a corner that it’s Government considers a departure from either the single currency or the EU itself.

A breather or a correction?

It is not yet clear whether the recent fall in the value of the dollar has been a simply taking of stock by traders or the start of a longer correction. It is also hard to say whether the dollar is reacting to the euro or the other way around. I prefer the former argument, since as I explained above, there are still severe storm clouds above the single currency.

The dollar faces its own significant drivers over the next few days as first the employment report is released today, and the midterm elections take place of Tuesday.

Some attention will be focused on the possible adjustment to the September headline figure today as traders look for confirmation of the effect of recent storms on the data or whether this is the first sign of a slowdown in employment growth. With wage inflation likely to break 3%, it will take a poor figure, something below +160k to damage the dollar, particularly if there is a revision to September’s number also bringing it close to that level.

The dollar index fell to 96.20 yesterday closing at 96.31 following disappointing manufacturing data. The ISM report on manufacturing still shows significant expansion in the sector reaching 57.7 in September but it failed to reach market expectation for a 59 read following last month’s 59.8.