August Rate Hike in UK Back in Vogue
June 22nd: Highlights
- MPC Votes 6-3 in favour of no change in rates
- Italian Cabinet appointments spook Euro
- Weak U.S. Manufacturing Survey hits dollar
Wage pressures cited as Chief Economist votes for hike
It has rallied further overnight making a high of 1.3268 (04.30BST)
Haldane commented that he believes that several of the deals struck in the new round of pay negotiations will push wage inflation higher in the coming months. In normal circumstances, such thoughts would have possibly persuaded other members of the committee to follow, but with several headwinds facing the U.K. economy, a pre-emptive move is barely justified.
Versus the euro, the pound rose to 1.1459, its highest level in a week before settling back as the euro gained versus a weakening dollar (see below) to close at 1.1414.
The possibility of an August hike is also heightened by the weakening pound, which is sure to push up producer prices. This is seen as a precursor to a rise in consumer prices. It remains to be seen if inflation has bottomed out at 2.2, as seen in April, following a rise to 2.3% in May.
Euro sceptics fill two important Italian Cabinet roles
The relief that followed the agreement between Italian Prime Minister Giuseppe Conti and the President Sergio Mattarella over the makeup of the Cabinet has dissipated as more members have been nominated.
Conti has named two extreme euro skeptics to head up finance committees that will drive through tax cuts and welfare increases. This will add a further burden to Italy’s already overladen debt to GDP ratio currently, running at 132%.
Economists in Brussels and Frankfurt have expressed concerns over the nationalist policies of the new Government and it had been hoped that once elected they would temper their more radical ideas.
This is unlikely to be the case and the resurfacing of concerns hit the euro yesterday which made a new 2018 low versus the dollar of 1.1508 before rallying, as the dollar weakened, to close at 1.1603.
Next week sees the release of Eurozone wide inflation data which will show a small rise as the currency has fallen, making imports more expensive. Analysts expect CPI to have risen, year on year, from 2.2% to 2.3% following a month on month rise of 0.8%
The ECB is comfortable with the level of inflation which it can attribute to a weaker currency since it also aids exports, bringing growth to the weaker economies.
Manufacturing Survey hits dollar
Manufacturing activity fell from 34.4 to 19.9. There had been an expectation of a fall to 29 but such a large drop, which could be a one off, is a signal that President Trump’s tax cuts have not yet had the galvanizing effect that was expected. While it is too early for next week’s release of final Q1 GDP to show any effect from the tax reform, the market will be expecting to see a significant rise in Q2 GDP.
The dollar index had rallied to a new 2018 high of 95.53 driven primarily by the weakening euro but the tables were turned later in the day as the dollar took centre stage, falling to close at 94.88.
Data releases are reasonably light next week although along with Q1 GDP there is the release of Core Personal Consumption Expenditures for Q1. This measure of inflation is supposedly favoured by the Fed over CPI, which is more subjective, and any deviation from market expectations for a QoQ rise of 2.3%, unchanged from Q4, will have an effect on traders’ expectations for the timing of the next rate hike.
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.”