Daily Market Brief 22 Mar 2017

Inflation Surprise Drives Pound Higher

March 22nd: Highlights

  • Breaks Government target
  • Carney unconcerned
  • Dollar falls on FOMC dovishness

Forbes proved right?

At last week’s Monetary Policy meeting the most hawkish member, Kristin Forbes, was the single dissenting voice voting for a rate hike. Yesterday’s inflation data, while not quite proving her right, certainly underlined the need to consider a more hawkish view of the interest rate scenario in Britain.

Inflation hit 2.3% in February, up from 1.8% in January. Producer prices, which had risen at a monumental 20.5% in January, were little better in February climbing by 19.5%.

The pound, which had been on the back foot after the announcement over triggering Article 50 next week, immediately made back the previous day’s losses rising by 1.25% to test substantial resistance at 1.2500.

With such a volume of market orders ranged between 1.2500 and 1.2540, it is going to be tough for the pound to trade much higher before a correction sets in.

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Is Carney fiddling while Rome burns?

The Bank of England Governor, spoke yesterday at a professional standards conference. He said he was disappointed to see his deputy Charlotte Hogg resign over, what he called, an honest mistake.

During a Q & A session, when asked about the inflation data, he responded by saying that markets shouldn’t take too much notice of a single month’s data. He said that he prefers to look at the trend rather than one month’s “statistical anomaly”, which was a little odd considering that the trend for inflation has been higher for some time.

During his occupancy of the “top job”, Carney has impressed markets with his calm unwavering approach to the issues facing the U.K. economy. The only answer to his current bout of “laissez faire” is that he (and the most of his colleagues on the MPC) fear the headwinds from Brexit and are therefore prepared to overshoot the inflation target before it returns close to 2%. He has already stated that he sees inflation peaking at 2.7% later this year before falling.

Retail sales data, out tomorrow, will be the first indicator of economic activity which could back this theory. A strong number will provide fresh impetus to the currency. A break through the 1.2540 level could see traders that are still short closing their positions as the pound drives to 1.2680 and beyond.

Euro and Yen test resistance as dollar falls

A further contributory factor to the pound’s strength is the weakness of the dollar, due to the dovishness currently being exhibited by members of the FOMC.

This follows the statement at last week’s meeting where despite raising interest rates they managed to disappoint traders by failing to provide advance guidance over the timing of the next hike.

The three-hike strategy is already 2/3 complete and the first quarter is not over until the end of next week! Traders are preoccupied with the number of hikes there will be in 2017 which is different to the Fed., which looks at a rolling 12-month scenario reset with every hike.

The Japanese Yen, the markets go to currency at times of global risk aversion, rose to test resistance (dollar support) at 111.40 before settling back above 111.60. This is sets a new four month low for the dollar. A fall in U.S. equities is the primary driver of the dollar’s fall against the Yen. The Euro also tested recent highs close to 1.0800 and is currently trading 0.60% higher at 1.0790.

Wall Street fell sharply on Tuesday as investors worried that President Donald Trump will struggle to deliver promised tax cuts that propelled the market to record highs. The President continues to keep a low profile and this has led to a weakening of the effect of the “Trump Trade”

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.”