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29th July: Highlights
- UK economy to be boosted by relaxation of EU and U.S. travel restrictions
- Fed sees economy making progress
- Time not right, not even close, to end PEPP
UK drops restrictions on U.S. & EU visitors
Covid infections in the UK continue to fall, and the Chancellor will get some relief from the further reduction in the payments being made to workers who are still furloughed will continue
Data released yesterday showed that the level of retail sales slowed this month
But are still running well above the long-term average. The CBI commented that the key to continued growth is to ensure that the public feel safe and protected since the virus is unlikely to be eradicated for some years to come, if ever.
It is crucial that some degree of control over the Delta variant as Autumn and winter approach. Concerns remain that the recent hot weather has contributed to the fall in infections, but as the temperature begins to fall fears remain of a tough winter with hospitals again in danger of being overrun.
Comments from MPC members continue to dampen expectations of any change to monetary policy at next week’s Bank of England meeting.
There is not now expected to be any tightening of policy for several quarters and even when a cycle of tightening begins, very little change is expected since the neutral rate remains so low.
The entire market is now in the hands of Central Banks. It is some time since traders and investors were so controlled. Over the past few meetings, as inflation has risen, it has become of matter of when not if policy will need to be tightened.
The Bank of England, Fed and ECB subscribe to a common theme. Inflation is transitory, and no major economy can yet be sufficiently confident that the recovery is sufficiently robust for support to be removed or even tapered.
The pound reacted to news from New York. Yesterday, it continued its recent rally. It rose to a high of 1.3911 against a weaker dollar, closing at 1.3903.
Easy monetary policy necessary as recovery still not robust
Tomorrow’s release of preliminary data for Q2 GDP will be the final event that shows how strong the recovery has been since the country accelerated its vaccine delivery and began to reopen.
It is generally believed that this quarter will see growth moderate, and inflation fall a little. That is why Jerome Powell showed a degree of caution when confirming that the Fed would remain patient but vigilant in the timing of any tightening of policy.
Powell went on to say that the sectors of the economy that suffered most from the Pandemic continue to show improvement but have not yet fully recovered.
The Central Bank’s overarching goals are for the return of full employment and inflation close to 2%. Powell confirmed that policy will remain accommodative until those goals are met.
There was no hint as to when Powell feels the tightening will begin, although he has promised to provide markets with sufficient notice.
With CPI at 5.4% the market’s patience is being stretched close to its limit by the continued comment that inflation is transitory and a promise that it will fall soon. This is beginning to sound more of a hope than judgement, and it is demanding Powell to invest a large part of his credibility to keep the market onside.
Traders expressed their disappointment that a tightening of monetary policy isn’t imminent by driving the dollar lower. The index fell to a low of 92.23, closing at 92.28. It is unusual to see such a one-dimensional market view despite encouraging data releases.
ECB looking at global economy for inspiration.
Both Christine Lagarde and Jerome Powell will be relieved that they can concentrate on driving their respective economies without having to have every question they are asked prefaced by a demand to know when the tightening will begin.
While Lagarde is used to seeing the Bank’s credibility being questioned, this is not something she has experienced over a long and generally successful career.
By being bold in announcing the ECB’s intention to change how it both views and deals with inflation, she took a step that was certain to put her at odds with several of her colleagues on the General Council.
Over the entire life of the Eurozone, fears about inflation have ebbed and flowed and to take the step of changing how inflation is considered at a time when it is, in some peoples view on the cusp of becoming out of control is certainly a bold move.
It remains certain in traders’ minds that the ECB will be the last of the three most observed Central Banks to tighten policy. While both the Fed and BoE are likely to decide around the turn of the year, the ECB will wait at least until the end of Q1’22 before making any announcement.
Lagarde clearly wants to squeeze very drop of benefit from the PEPP facility before it gets wound down.
Central Bank meetings over the next two or three months are likely to be fairly dull, but the ability of their bosses to surprise will keep traders and investors interested.
Yesterday, the euro rallied versus the weakening dollar. It rose to a high of 1.1849, closing at 1.1844.
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.”