UK Economy in Focus
December 14th: Highlights
- MPC Meeting to focus on outlook for 2018
- Government defeated in Brexit vote
- Dollar lower as Fed hikes but leaves outlook unchanged
Data confirms MPC Dilemma
It is this gap that should be the major concern for the MPC which meets today for the first time following last month’s rate hike. The advance guidance provided by BoE Governor Mark Carney that rates would need to be raised to counter inflation, which is now more than 1% above the Government’s target, left the MPC in an impossible position. The pound was doomed to fall either way. Today’s meeting has no such pressure although the Governor will be expected to confirm his dovish view on the outlook for monetary policy.
The pound rose against the dollar in a move that was all about U.S. monetary policy (see below), whilst against the Euro, it closed virtually unchanged at 1.1347 having again tested resistance at 1.1380.
Traders are no longer willing to take fresh positions or add to existing ones with year-end approaching so much of activity centres around corporate activity. Following today’s MPC and ECB meetings activity will tail off quite dramatically although liquidity is unlikely to be affected.
Government defeated over Brexit vote
This was a symbolic action rather than an issue that will lead to anything more serious. Prime Minister Theresa May had already announced that there would be a vote but to enshrine it in the legislation means that the Commons won’t be presented with a “fait accompli” and will have real power to change anything that MP’s feel runs contrary to their constituents wishes.
Mrs May is in Brussels for the EU summit that is expected to rubber stamp the agreement that was reached last week that allows the negotiations to move forward to stage two. The slow pace that negotiations took with both sides digging despite the U.K. eventually capitulating means that talks are behind schedule with the March 29, 2019 departure date now just eighteen months away.
When talks resume the EU are almost certain to present further demands that the U.K. will initially rail against which will lead to talk of a hard Brexit with Sterling suffering. Whilst this is a pessimistic view, the reality of the past year has led this to be the only logical conclusion.
US rate hike sees dollar suffer
A classic case of “buy the rumour sell the fact” was exacerbated by the derailment of the unreasonable expectation that the Fed. would change its bias for 2018/19 and become more hawkish. They are predicting three hikes next year and the same in 2019 which is entirely reasonable given the expected path of inflation.
The dollar index fell to a low of 93.40 giving back the gains it had made over the past week. Versus Sterling, the dollar fell to a low of 1.3430 and the weakness has continued overnight with the pound making a fresh high of 1.3449. The Euro also benefited reaching 1.1826 and continuing to rally in Asian trade.
Inflation data which was released yesterday added credence to the Fed’s concern over the source and future path of price increases. Core inflation, discarding volatile items like food and energy, fell from 1.8% in October to 1.7% in November. As the new Chairman settles into his role from February and the outlook for inflation becomes clear, there is unlikely to be any move in rates before Q2 at the earliest, which also influenced the dollar.
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.”