Bullish View of Economy Drives Sterling Higher

MPC member sees lower unemployment and higher wages

Michael Saunders is one of two perennial hawks on the Bank of England’s Monetary Policy Committee. Far from being content with the hike that took place last November Mr. Saunders is starting rumblings about the timing of the next one.

Without any tangible evidence to back his view, he has predicted that unemployment, already at record lows, is going to fall further and wages are going to start to rise. His bullish view on the UK economy is starting to be shared by analysts who believe that once a transition deal is agreed between the UK and EU, the concern of a hard Brexit with a concrete deadline of March 29 next year disappears.

Sterling reached a high of 1.3914 yesterday and has made a fresh high of 1.3925 overnight (6.15am). It remains firm against the single currency, holding on to recent gains and making a fresh one month high of 1.1361. It has corrected a little overnight but remains comfortably above 1.1300.

Today sees the release of retail sales data for December. If the consumer has resumed support for the economy, the pound could test the 1.4000 level and, possibly, strong resistance at 1.4030.

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Market exuberance spills over into Euro

The Euro resumed its path higher yesterday following a bout of profit taking on Wednesday. It reached 1.2265 on its rise towards a test of medium term resistance at 1.2520.

While traders are prepared to take at face value the prospect of the tapering of the Asset Purchase Scheme commencing as soon as March’s ECB meeting, next week’s meeting is a little too soon to have any bearing on monetary policy.

Economic data for the entire region is still being considered in a pioneering manner since the currency is still less than twenty years old. There is no precedent for the effect of the variety of different economic and fiscal policies that are brought together under a single currency.

Sentiment indexes are particularly hard to predict since their constituent drivers can vary greatly.

For example, were Germany to still be “independent”, their economy would be powering ahead, the consumer would be more confident, and interest rates would be rising. Greece on the other hand is still teetering on the edge of another recession, expected to try to grow out of the ruins of the debt crisis without having had the “benefit” of a devaluation. Indeed, it is unprecedented for such an economy to have had its currency appreciate by more than 20% in a year. That illustrates perfectly the dichotomy facing the ECB.

Threat of Government shutdown pushes dollar lower

The childish, tit-for-tat, attitude of Politicians is never more clearly illustrated than in the regular display of brinkmanship that comes as the Federal Government in the U.S. wrestles with the threat of a shutdown.

It is an opportunity for Senators and Congressmen to promote their own agendas by holding back their support. It is glib to say that it is always resolved in the nick of time like the plot of some disaster movie as this year there is an added ingredient; President Donald Trump.

Trump has weighed into the argument stating that he wants an extension of funding for the Children’s Health Insurance Program (CHIP), a Democratic priority, to be excluded. An emergency funding agreement was passed to allow the Government to continue to operate until the deadline of February 16th. This is most likely another “non-story”, but until a solution is found, the threat remains of a complete shutdown of the entire Federal Government.

The dollar index fell yesterday reaching a low of 90.41 as it gave back all the gains made on Wednesday. With no fresh data due today the index is likely to finish the week on a low since negative sentiment is set to prevail.