Daily Market Brief 31 January 2018

Carney Comments Lift Sterling

Morning mid-market rates – The majors


January 31st: Highlights

  • Returning to “more conventional” lowering of inflation
  • FOMC meeting won’t focus on monetary policy
  • State of the Union draws little response

BoE Governor sees gradual pick-up in wages growth

Mark Carney, the Governor of the Bank of England testified before MP’s yesterday, giving his regular report on the economy and inflation. Carney sees a gradual firming of growth in wages and this coupled with falling inflation should see the incomes versus prices gap close and perhaps turn positive.

Mr. Carney who leaves his position at the end of next year with the UK likely to be approaching the halfway point in its Brexit transition, also said that he expects the Bank to return to more conventional operations in the coming months. This comment was construed by the market to mean that the dovish attitude to interest rate hikes may be hardening.

At next week’s MPC meeting the Bank will also publish its Quarterly Inflation Report in which it lays out the bank’s view on inflation in the coming three months and its likely course of action.

The Central Bank has found itself in the middle of the Brexit issue and constantly blamed high inflation on the drop in the value of the pound following the referendum. Now that more than 60% of that fall has been retraced a consequent improvement in inflation should be seen.

The pound rallied on the back of Carney’s comments reaching highs of 1.4167 and 1.1422. It has continued to firm versus the dollar overnight, reaching 1.4185 but has stalled versus the single currency falling back very slightly.

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FOMC Meeting unlikely to shed light on path of monetary policy

With inflation benign and Q4 growth at the low end of expectations, the FOMC meeting which concludes today won’t spring any major surprises regarding monetary policy either current or soon.

Janet Yellen leaves her post as the first female Chairman of the Federal Reserve today having, unusually, served just one term. Despite having performed very well without the charisma of several of her predecessors Mrs Yellen has brought consistency to markets through her desire for pre-emptive action and advance guidance. Traders are going to have to get used to a new style now as Jerome Powell takes over. He will be more “forensic” in his actions relying on fact rather than proactivity. The interest rate futures market is predicting three hikes in 2018 to match the three in the twelve months to December last year. This may turn out to be a slightly more hawkish view particularly if the two employment reports between now and the March meeting do not show a sufficient pickup in wage inflation to warrant a hike at that meeting.

The dollar index remains close to its multi-year low reaching 89.91 yesterday before rallying a little to close just above 89.00. It has remained on the back foot overnight following the State of the Union.

State of the Union brings nothing new

Hopes that President Trump’s first State of the Union speech would herald in his much vaunted but so far invisible economic stimulus package were dashed as the President appeared long on rhetoric and short on policy. This has been his stock position over the first year of his Presidency.

Trump called for congress to make progress on his $1.5trn infrastructure bill but the ways and means committee members are concerned about the funding for such projects should the dollar weaken, and Government bonds become less attraction to China and Japan.

The Euro rose against a slightly weaker dollar for no concrete reason other than traders prefer to be long of the single currency as that hedges themselves against what they see as the Treasury’s covert weak dollar policy.

There are few new factors to affect the single currency right now but as we move into February the campaigning in the Italian election will hot up and if opinion polls start to show gains for anti- EU, anti-Euro, opposition parties, the Euro could correct back towards 1.2000. ECB President Mario Draghi is concerned about further Euro strength (or dollar weakness) hitting Eurozone competitiveness and is determined to leave monetary policy unchanged until the picture becomes clearer.

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.”