Bailey neutral on current risks
19th March: Highlights
- Bank of England content to wait and see
- The era of the proactive Central Bank continues
- Inflation upticks of no concern to the ECB
No change in interest rates or future indicators
The Bank has confidence in its own actions and almost more importantly supports the stimulus delivered in the Budget.
The only cautionary note is the fact that the budget was more supportive of the economy than a package of stimulus measures designed to combat any soft patch going forward.
Price action across most financial markets showed that the majority of traders and investors had priced in no change to either official rates or the level of bond purchases.
There is a concern going forward that unemployment will get close to out of control in late Autumn/early winter, just as Rishi Sunak was hoping to see benefit payments fall and tax receipts rise.
The fact that the Committee voted unanimously does not actually provide any comfort that the status quo will remain policy.
Since Bailey doesn’t possess a crystal ball how he will give sufficient notice of a cut in rates into negative territory remains to be seen if it becomes necessary.
The overriding result of today’s meeting is that the MPC won’t rock the boat, by making any change to monetary policy, even if inflation starts to climb towards target, until the economy is considered to be on an even keel.
Another indicator of the clear expectation that the MPC would be benign, was the fact that the currency barely reacted.
It fell marginally as those who were prepared to take a gamble on higher rates or at least some hawkish comment cleared their long positions, obviously disappointed.
It reached a low of 1.3897, finally closing lower overall at 1.3935.
It seems that the market remains overall bullish for the currency driven by the confidence of the Government in the continued success of the vaccination programme and the fact that the lifting of lockdown remains on course.
Powell asks for market to accept higher inflation
The concern over employment will remain as long as weekly jobless claims data continues to disappoint.
Initial claims rose from an upwardly revised 725k to 770k, while continuing claims remain in the doldrums, falling slightly but remaining above four million.
Most leading indicators continue to point to a sustained recovery but the possible note of caution from Jerome Powell following the FOMC most certainly points to concerns over employment.
The Philadelphia Fed index of manufacturing which was released earlier points to an economy which could clearly be on a path to overheating.
That is not a word that Powell will use but the FOMC may have to be quite nimble if it is to stop inflation climbing to well above its 2% target while keeping r rates at the current level until late next year at the earliest.
While Biden’s Plan was called a stimulus, there was still plenty of support included and that is what riled Republicans when the Bill was passing through Congress.
The U.S.is a country built on standing up for yourself so paying more to people with no jobs as welfare draws criticism across the entire Political Sphere, but mostly with Republicans.
The dollar index rose as yields on Government bonds also climbed. As the FOMC comments were digested. It reached a high of 91.89, closing at 91.86, trading almost exactly the same range as yesterday.
ECB always tends to ignore rising inflation
While the entire country’s fears are historic and deeply held, the fact that economies are so closely linked to each other via globalization means that if a developed economy is blighted with high inflation then its neighbour and/or trading partner will likely be suffering the same malady.
In fact, recent history has shown that despite a huge amount of bleating and forcible measures being put in place, the Eurozone has been something of a success if measured in financial discipline, although there may be several skeletons in several cupboards.
It may not always be pretty, but it is efficient, on the surface.
However, the picture has started to change again, and a Central Bank almost encouraging inflation will be seeing a few eyebrows raised in Frankfurt.
The currency is unable to regain the 1.20 level versus the dollar and that is leading traders to believe that the long-term support around 1.16 could become a target.
It has long been expected that the euro could easily see parity again versus the dollar. That would be a significant boost to Eurozone exports; two issues stand in the way.
First, the U.S would be labelling the region a currency manipulator and slap tariffs on Eurozone exports of both vehicles and airplane parts. There is already a row brewing over state aid to Airbus and Boeing. The second issue would be inflation. Were the single currency to dip even below1.10 the inflationary effect would draw a response from the Central Bank, and a significant tightening of monetary policy would end any recovery.
Yesterday the euro fell to a low of 1.1908, closing at 1.1919. The first significant point of support is around the 1.1840 level.
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.”