Daily Market Brief 20 April 2018

Carney casts doubt on Rate Hike

April 20th: Highlights

  • “There are other meetings this year”
  • Dollar sentiment improving as risk appetite grows
  • Euro range continues to narrow

Sterling losing “gloss” as retail sales disappoint

Sterling looks like ending a decidedly difficult week on the back foot following uniformly unsupportive data and the words of Bank of England Governor Mark Carney pouring cold water on the idea of a rate hike at next month’s MPC meeting.

Regular readers will know that I have been against the idea of a rate hike for some time. It has been difficult to marry the idea of falling inflation, a marginal improvement in wage growth and the various housing, industrial production and retail sales reports with the idea that the Bank of England needs to hike rates particularly as Sterling’s rally over the course of 2018, it has risen by 3%, is providing a positive backdrop to the fight against inflation.

For MPC members to have chimed that rates needed to rise to offset the fall in Sterling and its effect on inflation since the Brexit referendum and then demand higher rates as sterling recovers is hard to reconcile.

The retail sales data for March which was released yesterday reflected consumer concerns over the possibility of a rate hike although it was most likely magnified by the unseasonably poor weather seen during the month. Month on month sales fell by 1.2% versus an expectation of a 0.5% fall. This led to a year on year rise of just 1.1%

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Carney adds a dose of realism

Bank of England Governor Mark Carney spoke yesterday of the need for the Bank of England to put recent data in context since the pressure to raise rates has eased somewhat with the fall in inflation to 2.5%, bringing it closer to the Government’s 2% target.

Carney noted that there will be some differing views at the May meeting commenting that he is conscious that there are other meetings this year. This is a clear indication that he feels that until a hike is clearly warranted that he prefers to remain cautious about the path of the economy.

Sterling had been under mounting pressure all week as the post-Brexit high was proving difficult to crack amidst strong sentiment but weakening economic fundamentals. It fell to a low of 1.4068 yesterday, closing on its support at 1.4086. Versus the single currency it fell to a three-week low of 1.1402 and closed close to that level.

With the Brexit Bill failing to find support in the upper house of Parliament and the final terms yet to be agreed with Brussels “discretion could and probably should be the better part of valour” as the May MPC meeting approaches and the headwinds mount.

Euro turning in on itself as ranges narrow

The single currency has traded in an eighty-four-pip range so far this week as a mixture of factors conspire to provide its narrowest range so far in 2018. Whilst there are few drivers to push it out of its wider 1.2260/1.2520 range trading has ground to a halt on a short-term basis due in the main to the volume of liquidity that the market is now providing.

The European Central Bank’s monetary policy is almost cast in stone. Traders understand that despite the odd call for higher rates to head off the threat of higher inflation “somewhere down the road” until conditions change markedly, interest rates will remain low and accommodation will continue.

Economic data is neither supportive of a rate hike nor demanding further measures, so the ECB is in the enviable position of being able to control matters with the lightest of touches.

In contrast, The Federal Reserve in the U.S. feels it needs to be seen to be doing something to affect the economy where it could take a leaf from the ECB’s book. The last rate hike was little more than “tinkering” yet traders are concerned that there will “only” be three hikes in 2018.

The dollar index, influenced by its largest constituent part, the euro, remains in a tight range, unable to make significant progress above the 90.00 level, coinciding with strong support for the single currency close to 1.2330/40.

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.”