21 June 2021: BoE won’t be slow to taper

BoE won’t be slow to taper

21st June: Highlights

  • BoE to introduce talk of tapering
  • Powell’s testimony to put some meat on the bones!
  • Draghi’s Superstate ideals clash with his domestic agenda

Outgoing Chief Economist warns of inflation concerns

There is little doubt among members of the Bank of England’s Monetary Policy Committee that the Bank will be in a position to begin to taper the level of support being offered to the economy sooner rather than later.

Discussions concerning the fact that the Government is about to start to withdraw several support measures, including the Furlough Scheme, are taking place in the wider economy.

Members of the MPC, especially the outgoing Chief Economist Andrew Haldane remain bullish about the recovery. There will be some discussion at the meeting on Thursday about inflation and the pace at which the recovery can take place.

Chancellor Rishi Sunak appears to be among a cohort of Ministers that Prime Minister Boris Johnson can trust to make policy decisions that won’t be challenged down the road by disgraced political advisors.

Sunak was sufficiently confident to put measures in place to combat the Pandemic and since the recovery is now well under way, he will be considering how the high level of borrowing can be reduced.

The Prime Minister remains confident that the delayed removal of the final restrictions will take place on July 19th.

There is very little opposition to that expectation now, since the scientific community’s concerns have been considered and those sectors of the economy, primarily travel and tourism, have been left with little or no alternative.

There is something of a dilemma facing businesses. On the one hand, many are saying that they are unable to find employees to fill vacancies, while on the other, they are complaining that the furlough may be being removed too quickly.

UK business owners tend to be pragmatic about regulations they have to face, while their employees tend to be members of trade unions committed to collective bargaining but not averse to looking after themselves.

The Bank of England will probably provide a boost to the pound at their meeting on Thursday, following a week in which they have seen Sterling tumble.

It fell to a low of 1.3792 versus a rampant dollar, closing at 1.3808. Against the single currency, it continues to be well-supported. It rose to 1.1707 but fell back to close well within its recent range at 1.1635.

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Fed Chief to be grilled by Senate committee

St. Louis Fed President Fred Bullard who is a non-voting member of the FOMC this year explained a little about the meeting held last week.

Fed Chairman Jerome Powell formally introduced as an agenda item, a discussion about the tapering of the Fed’s bond purchase programme.

The conversation centred around the distinction between fiscal stimulus and monetary support, and the upcoming Congress conversations regarding the President’s stimulus package will have no influence over when tapering begins or interest rates begin to rise.

Bullard went on to explain, as if any explanation were necessary, that the more hawkish tilt of the FOMC is in reaction to the better performance of the economy due mainly to the take-up of vaccinations.

Treasury Officials have begun to voice their concerns about rising inflation and how the likely additional stimulus is to drive monetary policy higher.

White House Economic Advisor Jared Bernstein commented that concerns about inflation have not abated despite the beginning of conversations within the FOMC. The White House agreed with Jerome Powell’s assertion that rising inflation is due to several one-off measures and will turn out to be transitory.

The interconnectedness of the global economy was once again highlighted as during the talks between the U.S. and China over trade spilled over into a U.S. warning over the avoidance of China of discussions about the origins of the virus.

While there is no suggestion (yet) regarding the fact that its release was an accident, Chinese dodging of direct answers to questions, has led to a riding degree of suspicion.

The dollar index uncoiled a major part of its pent-up demand following the FOMC despite its more hawkish stance being well expected.

The index rose to a high of 92.40, closing at 92.32 last week.

There is still a healthy debate taking place about its medium-term direction. It looks very well-supported following the FOMC, but as other Central Banks begin to tighten policy themselves.

Currency entering a sell the rally phase

Despite a major debate raging about the future path for the dollar index, one of its major constituents is definitely in the market’s sights.

The euro has had its golden moment over the past few months but has been almost solely driven by the markets’ concerns about when the Fed would start to taper.

The ECB continues to appear to work to a well-defined template. It is expected to begin to taper its bond purchases next March, which was the date that was contained in the original timetable for support.

When Mario Draghi took on the role of Italian Prime Minister, several analysts questioned how he would be able to reconcile his rigid commitment to a European Superstate with a single budget and fiscal policy with his love for his home and his obligation to doing what is best for Italy.

As the Union slowly exits the Pandemic and begins to recover from the lockdowns that have been a factor for more than a year, Draghi is going to face (in sporting terms) a club versus country decision of the gravest kind.

Draghi believes 100% in the European Ideal, but he and his rather tenuous group of supporters must be conflicted about whether it has either the capacity or the will to participate.

Taking greater control of the use of emergency funds provided by the EU commission, Draghi has been true to a speech that he made while still ECB President.

He has committed that the funds will be used to stimulate growth and investment in infrastructure projects, rather than used to provide support for the ailing economy.

There are obvious fears that the pandemic, its economic effect, and the way in which the frugal five acts going forward will blow the entire project apart. However, taking finance aside, there is a degree of single mindedness that will not allow the project to fail.

The euro suffered at the hands of a stronger dollar last week. It fell to a low of 1.1847, closing at 1.1863.


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.”