Dovish Carney Hits Pound

Carney’s Economic concerns dampen rate expectations

In a speech to City Bankers yesterday, Bank of England Governor Mark Carney cooled traders’ expectations for a rate hike commenting that “now is not the time to hike rates”. His comments follow on from last week’s MPC meeting when the vote to leave rates unchanged was 5-3.

Carney cited weak wage growth and conflicting signals from the consumer and business investment as reasons why rates should be left unchanged.

The pound fell against both the Dollar and Euro once the text of the speech had been released. Against the dollar, Sterling broke through support at 1.2640 making a one week low of 1.2603 before recovering a little. The Euro broke back above the 0.8800 level which had proven tough over the past few weeks rising to 0.8836.

Carney has been consistent in voicing his concerns over the headwinds that are affecting the economy as growth has slowed, inflation risen and wages stagnated. There is a view that the two additional dissenting votes at last week’s MPC were designed to show that there is concern over inflation which reached 2.9% last month and should it break 3% in June, concerned voices will grow stronger.

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Political deal still not confirmed

The Government’s deal with the Democratic Unionist Party which will allow the Queen’s Speech to be passed together with a budget continues to falter. The leader of the DUP has voiced concerns that her Party will be no more than a prop holding up a severely weakened and unpopular Conservative Government.

It is almost two weeks since the election and such a time-lapse without a minority Government sealing a deal to allow it to allow it to rule is unprecedented.

The Prime Minister, Theresa May is under pressure to seal the agreement while the opposition parties are sure to be “on the attack” later today when the debate over the Queen’s Speech begins.

Brexit will dominate the Government’s agenda and a more consultative programme is likely to be announced. The more radical manifesto pledges are likely to be watered down or scrapped entirely. This will lead to calls for another election given that the swathes of the manifesto on which the Government was elected have become redundant.

The U.K. is likely to face a “summer of discontent” as the Government’s popularity continues to wane. The summer recess which starts on July 21st may just provide some respite but an Autumn election continues to be the base case.

Interest Rate Differential supports Dollar

The dollar index paused in its recent rise yesterday as falling oil prices drove a taming of inflationary pressures in the U.S. economy.

Whilst there are still concerns over the effect of the Fed’s rate hikes on continued economic growth, the interest rate policies adopted by the Bank of Japan and European Central Bank are providing support for the dollar. Interest rate differential is a major driver of foreign exchange rates and following a prolonged period of rates at or close to zero the dollar is receiving support from the three hikes already passed this year.

An output cut agreed by OPEC, whilst being complied with by its members, is being largely flouted by the new non-OPEC producers. Oil prices fell to nine-month lows.

A quiet week of economic data releases has allowed the big picture and political factors to dominate and despite the most positive outlook almost since its inception, the Euro is still not able to make further gains against the dollar.