BoE Officials Upbeat in Testimony
February 22nd: Highlights
- Wage inflation unchanged as unemployment rises
- FOMC Minutes confirm upbeat view of economy.
- Euro breaks key support
Bank of England sees upside risks in inflation
Andy Haldane the Chief Economist ran through the Bank’s projections for the economy and advised that it was his view that interest rates may have to rise at a faster rate than the markets are pricing in, to bring inflation under control and curb demand. Haldane went on to say that he believes that both the global and UK economies could perform at a stronger rate than has been predicted recently.
Governor Mark Carney backed Haldane’s comments adding that he felt that the market had “got the message” from the Bank and that they were cautiously optimistic about the economy. The underlying tone of the testimony, particularly regarding inflation seems to be that possibly they could have acted more quickly. I have felt for some time that the excuse that the fall in Sterling drove inflation up was acceptable but to sit back and do nothing wasn’t.
There was a lot going on around Sterling yesterday. It reacted to the BoE testimony, the slight rise in unemployment and the continuing recovery of the dollar. It closed at 1.3920 versus the dollar having reached a low of 1.3904. Against the Euro it fell following its recent rally closing at 1.1326 having recovered from a low of 1.1293
FOMC minutes provide impetus to dollar rally
There was a far more upbeat view of inflation than has been seen recently and since the meeting was held on January 31st they will have had access to advance estimates of the employment report which showed wage inflation growing at a far higher rate than it has in over a year.
The core view of the market is for three hikes but four is a possibility particularly if the February employment report confirms the rise in the rate of wage increases.
The dollar index continued its recent rally reaching a high of 90.14. It is approaching very strong resistance at 90.50 but given the current strength of the rally that could easily be tested. The first hike in this series should take place at the May meeting which will be held on the first and second. There is no meeting in April due to the Easter holiday otherwise, it is likely the first hike would be then provided the economy continues to perform as expected.
Euro breaks support at 1.2280.
Yesterday, following the release of the Fed minutes it rallied quite strongly then fell like a stone, initially holding above 1.2280 then breaking through to reach a low of 1.2264 overnight.
The rise in the dollar index and the fall in the Euro go hand in hand given the large proportion of the index represented by the single currency.
There seems to be a lull in significant drivers for the Euro with data coming in in line with market expectations. Yesterday’s release of purchasing managers indexes showed they fell a little as predicted but were within the bounds of anticipation.
Today sees the release of business confidence data in Germany. While Sr. Draghi prefers to consider the performance of the weaker, rather than the stronger, economies of the Eurozone, the market tends to believe that if Germany is performing then the rest of the region will get pulled along in the slipstream.
As data remains within accepted ranges, traders’ thoughts turn to monetary policy. Sr Draghi is going to be under pressure following the next ECB meeting, although that isn’t until April 26th, to provide some guidance on the withdrawal of the Asset Purchase Scheme.
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.”