Bank of England Remains Dovish
December 15th: Highlights
- Risk of disorderly Brexit recedes
- Sterling in narrow range
- No signal from ECB on stimulus
Central Banks providing mixed signals
The Federal Reserve raised rates earlier in the week and then expressed concern about the source and direction of inflation dashing traders’ expectations that they would move from a three to four hike strategy in 2018.
In London, the Bank of England’s Monetary Policy Committee remained dovish about the prospects for a further interest rate hike in 2018 despite commenting that the threat of a disorderly Brexit had diminished. They see signs of a moderate slowdown in economic activity, virtually confirming that last month’s hike was no more than reversal of the knee-jerk cut which followed the Brexit referendum.
Yesterday’s meeting of the European Central Bank was also in dovish yet confusing mode. They raised their forecasts for growth and inflation yet also said that accommodation would stay in place for “as long as it was needed”. This ambiguity drove the Euro lower. It fell to 1.1770 versus the dollar and 1.1407 against the pound. It has fallen a little further overnight with Sterling making a high of 1.1415.
Trade talks postponed to March
At home, Mrs May faces another defat in the House of Commons next week. This week the minority Government saw its first defeat in a vote in the House of Commons since the General Election and the deal with the DUP that allowed Mrs May to form a Government. That was over the issue of a vote in Parliament prior to the Brexit agreement being ratified. Next week she faces another defeat over the enshrining of the date of Brexit in the legislation. While this is providing voters with closure, it is also considered to be superfluous since the transition period is yet to be discussed and agreed. These two relatively minor setbacks could set the tone for tough debates to follow.
The pound has been in narrow ranges as activity fades with year-end approaching. It closed against the dollar just twelve pips higher at 1.3429 but has moved a little higher overnight making a high of 1.3448. Versus the single currency, it rallied a little higher as has already been mentioned, as the market was disappointed by the ECB’s dovish tone.
Well known drivers to remain through Q1
The FOMC concerns over inflation are well known so there will be interest in the perceived breakdown between job creation and wage growth. It is a mystery that as headline employment data has been relatively strong and the unemployment rate has reached close to 4% why wages haven’t been rising faster.
In the U.K., Brexit is the “only game in town”, but as negotiations about the trade deal won’t start until April, the political ramifications of Conservative rebels siding with opposition Labour MP’s and defeating the Government over what have, so far, been minor amendments to the Brexit Bill will be worrying Theresa May. Her position has been weakened despite the move to stage two in Brexit talks and she could still face a leadership challenge in the coming months.
Mario Draghi’s stock has risen considerably in 2017. He has been feted by the weaker members of the Eurozone whose economies have taken longer to recover from the financial crisis and drawn grudging praise from the Bundesbank for presiding over the return to growth without inflation rising by any noticeable degree. This considered approach should continue through H1 ‘18 as there are no particular economic clouds on the horizon although there could be political headwinds forming in the shape of the elections in Sr. Draghi’s homeland of Italy.
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.”