Daily Market Brief 12 May 2017

Mixed BoE Sends Pound Lower

May 12th: Highlights

  • Growth forecast lowered
  • Inflation to peak at 2.8%
  • 7-1 vote to leave rates unchanged

Carney hoping for “orderly” Brexit

The combined effect of yesterday’s Bank of England Quarterly Inflation report and Monetary Policy Committee painted a confused picture of the prospects for the U.K. economy.

The need for a hike in interest rates has been moved back nine months from the February report. The inflation report predicted that inflation would peak at 2.8% in the Autumn up from 2.7% previously. This is not sufficient to warrant concern or require a rate hike.

It is probable that rate won’t be increased until after Brexit has taken place and Mr. Carney has ridden off into the sunset like the hero of a “B” movie, his work done.

Overall, traders saw the report as mixed as best and pushed Sterling lower versus the dollar and Euro. The 1.3000 level against the dollar is proving a daunting obstacle. Some correction of the 3% rise since the election announcement was always likely and the lack of a more positive economic outlook proved the catalyst. The pound fell to 1.2850 before recovering to 1.2880, falling 0.7% on the day. It was a similar story against the Euro falling to 0.8450 before recovering to reach 0.8435.

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Growth Forecast Lowered

In his press conference following the MPC meeting, the Governor commented that is Brexit can be a relatively smooth process that the U.K. has the foundations in place for a period of sustained growth. The two previous Quarterly Inflation Reports had seen large upward revisions in growth forecasts as the Bank was caught off-guard at how well the economy had reacted to the Brexit vote.

A sprinkling of realism pervaded this latest report with growth prospects being tempered. The forecast for growth this year has been lowered to 1.9% from 2% but subsequent years have been lowered a little to 1.7% and 1.8% respectively.

Carney expects the weak preliminary Q1 GDP figure of 0.3% to be revised upwards but voiced concern that households face a challenging time to balance their own budgets.

Kristin Forbes was, again, the lone dissenting voice at the MPC meeting. She leaves at the end of June and her views, balancing those of the Governor will be missed
One of the factors adding to the prospect of higher inflation is the possibility of tightness in the labour market. Employment has been a constant bright spot in the U.K. economy but wages growth has been stubbornly slow. A rise from 2% to 3.5% later in the year is projected as firms find it harder to recruit ad unemployment remains below 5%

Dollar facing headwinds

The prospects for economic data that is sufficiently positive to encourage a rate hike next month together with further political problems could weigh on the dollar in the next few weeks.

As risk aversion has dropped since the start of the French election, the dollar has risen by more than 4% against the JPY. Following weaker than expected Q1 GDP and the spat over Trump’s removal from office of the Head of the FBI, some of those gains have been eroded.

GDP growth is likely to remain below 2% for H1 although in general the developed global economy appears to have shifted in a pattern of below 2% growth. That is true of the U.K. and The Eurozone together with the U.S. It is possible that this is the new post-apocalyptic landscape analysts can expect.

There is a G7 Finance Ministers meetings starting today in Italy. The other six participants will be looking for more cooperation from the U.S., particularly over protectionism. There is some relief that no country has yet been labelled a “currency manipulator, but the threat of tariffs has been viewed with some concern.

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.”