14 November 2019: Inflation tumbles to three year low

Inflation tumbles to three year low

14th November: Highlights

  • Election news masks weak data
  • Powell hints at no more cuts as Russia cuts dollar holdings
  • “Vulnerable” euro threatens 1.10 despite data positivity.

Energy and Property prices main contributors

Last week, the Monetary Policy Committee of the Bank or England intimated that the slowing economy could warrant lower interest rates going forward.

Since Governor Mark Carney faced the press following a meeting which was decidedly dovish, his comments have been backed up by the data that has been released. Q3 GDP saw the economy growing but at its slowest rate in ten years.

Yesterday, inflation data was released and lower prices for fuel and continued slowdown in house price increases led to a headline inflation reading of 1.5% for October. This was down from 1.7% in September and, although the market had expected a fall, predicting 1.6%, the eventual release came as a shock to the market.

The data backs the outcome of the MPC meeting where two members voted for an immediate cut and will provide justification for a cut at the next meeting.

The election rumbles on with the two main Parties vying to be the one that injects the greater amount of stimulus, via public spending, into the economy. The latest polls put the Conservatives well ahead with an expected 40% of the vote, Labour second on 30% and the Liberal Democrats on 16%. This represents the largest Conservative lead since before the last election and would almost certainly translate into a working majority for Boris Johnson.

Yesterday, Sterling reacted to the data but the election polls which make a Brexit outcome more certain provided support. The pound fell to a low of 1.2815 but recovered to close just two pips higher on the day at 1.2854.

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Fed Chair rebuffs pressure from Trump

In his regular testimony to the Senate’s Joint Economic Committee yesterday, Fed Chairman Jerome (Jay) Powell commented that he sees little reason currently to (accede to pressure being exerted by the President and) agree a further cut in short-term interest rates.

Powell’s comments were bland, and he gave himself a caveat by saying that the current stance on monetary policy is appropriate if the data that the Fed is receiving remains constant with recent releases.

So, he is basically saying that if the economy continues its current path interest rates will remain unchanged. That is an exercise in stating the obvious but was also a response to President Trump who renewed calls for looser monetary policy.

Following this week’s higher than expected inflation report, although the Fed prefers to study Personal Consumption Expenditures to Consumer Prices, the market will readily agree with Powell’s balanced view of the future.

Rates have been cut by 75 basis points this year and Powell warned the Committee that Government Spending remains an important tool for stimulating the economy although he warned that the current level of debt is unsustainable and could tie the hands of Congress.

He touched briefly on the ubiquitous trade talks which continue between Washington and Beijing, but he clearly discounts their effect until there is some meaningful outcome.

The dollar index remains within its well-known range between 98.80 and 98.20. Yesterday it traded between a high of 98.45 and a low of 98.29, closing at 98.34, unchanged on the day.

Single currency lacking credibility

Using the currency as a barometer of the market’s view of the Eurozone economy, scepticism remains that those in power have the will to drive the economy forward and effect the changes that are necessary to see the region thrive.

Recent releases of economic data support the view that growth has all but disappeared although it remains doubtful that any recession will be anything other than short lived.

Yesterday’s release of data for the region’s Industrial Production in September showed an increase of 0.1% following a rise of 0.4% in August and a market expectation of a rise of 0.3%.

This summarises the trend in recent data perfectly, still in positive territory but disappointing for the market since it is below their expectations.

Given the lack of tools available to the ECB to effect changes to monetary policy it will be up to the new President of the Central Bank to bring in a radical blueprint for how the economy can get back to sustainable growth.

Since its inception twenty years ago the Eurozone and its regulatory bodies have been beset by problems, some of their own making and some unavoidable but it must guard against the growing view that the Eurozone is fatally flawed. While it clearly cannot continue to exist in its current form it has an opportunity to change if those at the top are able to be bold and grasp the nettle of greater integration.

The currency remains weak, toying with support at or around 1.10 versus the dollar. Yesterday, it traded down to a low of 1.0995, closing at 1.1008. Overnight it has again fallen below 1.10 and is currently (0600 GMT) trading at 1.0998

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.”