Daily Market Brief 4 August 2017

Dovish MPC Drives Sterling Lower

August 4th: Highlights

  • 6-2 vote leaves rates unchanged
  • Brexit concerns lead to caution
  • Employment report to determine short term direction for the dollar

Carney continues cautious approach

As had been generally expected following recent data releases, the Bank of England’s Monetary Policy Committee voted by six votes to two to leave interest rates at record lows. Recent economic data releases including growth, inflation and wages led the committee to the conclusion that this trend is likely to continue for some time yet.

In his press conference following the meeting, Governor Mark Carney voiced his concerns over how Brexit is beginning to affect the actions of consumers and businesses alike. He announced a cut in the Bank’s forecasts for growth in 2017 and 2018. For 2017 growth is expected to be 1.7% down from 1.9% and for 2018 to 1.6% from 1.7%.

The Brexit referendum result and subsequent fall in Sterling is now feeding through into consumers daily lives as real wages fall. Despite strong headline employment growth, the underlying adjustment to what makes up the data conceals how training schemes, part-time and zero hours contracts including the “gig economy” are treated. Employment is clearly not as strong as the numbers predict leading to slow wage growth. With inflation last reported at 2.6% and wage growth at 2.1%, consumers are seeing their pay packets shrink in real terms.

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Sterling falls to years low in wake of MPC

The pound had been steadily rising recently against the dollar as the greenback suffered from the political storm engulfing Washington reaching a high of 1.3268.

That strength was overturned in the wake of the MPC vote and subsequent press conference. It fell by close to 1.20% to 1.3112 before recovering a little to close at 1.3138. Versus the Euro the 0.9000 level was conclusively broken with the common currency reaching 0.9050, closing close to its high at 0.9033.

The outlook for the pound has now turned negative as the prospect for a rate rise in the U.K. and therefore the potential for any closing of the interest rate differential between the pound and dollar has been deferred until next year at the earliest. Despite just a 50% chance of a further hike in the U.S this year, the gap is set to widen.

It is reported that Carney is in favour of rates staying at their current level until the end of Brexit negotiations in March 2019.

New member Silvana Tenreyro joined Chief economist Andrew Haldane in voting for the status quo leaving confirmed hawks Ian McCafferty and Michael Saunders as the only dissenters.

Employment report to drive short term dollar direction

Today’s employment report in the U.S. will be eagerly anticipated by traders even if it is less so by analysts and commentators. The notoriously fickle headline number, which can be subject to revisions of up to 25%, serves to provide an instant snapshot of economic performance in the previous month however unreliable.

Analysts have taken to using the average of the past six months data as their base case for the headline. The prediction for today is +183k new jobs in July. Not particularly scientific or well researched but it provides a reasonably steady baseline for traders to work with. Above average buy dollars, below average, sell.

The suspiciously high June number of +222k is likely to be revised and that is where the true value of the report is found. Anything above +200k should be dollar positive.

The Euro is trading at a level not seen since January 2015 and every new high brings a correction closer. If we were to see a headline above +200k and only a small revision to June’s data we could see a correction, although even 2% would leave the overall uptrend intact.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”