Fed to continue hiking rates through 2019

Jerome Powell, the Chairman of the Federal Reserve, gave his first testimony to the Senate Banking Committee yesterday and continued his upbeat view on the U.S. economy. He commented that the prospects for growth were positive although he was confident that inflation would remain below 2%.

He played down fears of an extended global effect from a trade war with China, a concern voiced by the IMF the previous day, and said that the Fed would continue its hiking bias well into 2019.

He said that it is vital that the Fed gets monetary policy right to ensure that employment growth remains strong although he sees some “tightness” in the labour market as the unemployment rate falls below 4%. Powell acknowledged a delicate balance between raising rates sufficiently to keep pace with the growing economy but not so much as to be a factor in any slowdown.

Traders liked what they heard from the Fed Chairman and the dollar index rose accordingly. Versus a snoozing euro, the dollar rose to 1.1649, closing at 1.1661. As I have said before, the ECB is content with a weaker single currency given its beneficial effect on the economy and exports, so it is set to trend lower. The dollar index rose to 95.06 and has continued to rally overnight as Asian stock markets take on a risk-on profile which also benefits the greenback.

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UK Government survives another Parliamentary vote

The Brexit Customs Bill managed to squeeze through Parliament yesterday in the same way as the trade proposals had the previous day as Prime Minister May desperately clings to both her proposals and her job.

The Chequers Proposals have been “cut and pasted” several times but now appear ready to be put before the EU which is likely to reject several of them, in particular, the idea that the UK should collect customs levies on goods passing through the UK on their way to the EU and that that Brussels should reciprocate on behalf of the UK.

While it may work on paper, in the real world such a convoluted proposal would bring chaos to ports and likely, place the UK in a weaker position than it was pre-Brexit.

Mrs May is now desperate for Parliament to reach its summer recess, whereupon she will have time to reflect on the next steps in both her Premiership and the entire Brexit process.

Her fate is now inextricably tied to the Chequers proposals together with the amendments forced upon the Government by the “leave” half of her Party. She faces an impossible task if Brussels, as it is quite possible it will, rejects large parts of the proposals, since this is the limit of what she is prepared to offer.

Pound falls on Powell and Carney comments

Two Central Bank Heads, Mark Carney and Jerome Powell, speaking on entirely different subjects both managed to send the pound lower yesterday. Powell’s comments sent the dollar higher across the board and the pound fell to a low of 1.3068. It recovered slightly to close at 1.3116 but has resumed its fall overnight.

The pound fell even more precipitously versus the euro, reaching a low of 1.1221 before closing at 1.1248. It has recovered a little overnight on profit taking by short term traders reaching a high (0600BST) of 1.1257.

Mark Carney, the Governor of the Bank of England added to the pressure on Sterling by commenting that if Brexit talks with Brussels turn out to point to a no-deal or hard Brexit, the Bank would have to revise its entire monetary policy outlook to provide support to the economy and the pound. He warned that the UK will face grave economic consequences from a hard Brexit. This could lead to an emergency interest rate cut.

His words took any prospect of a rate hike next month off the table. In evidence to the House of Commons Treasury Select Committee, Carney was cautious about how the Bank would react going forward clearly concerned about the effect of his words on the currency but was sufficiently forthright to confirm his worries for the long-term prospects for a no-deal Britain.