BoE hike a “done deal”?
July 31st: Highlights
- Carney’s words of justification to be highly significant to market
- Euro rally within range as ECB “out of the picture”
- No rate hike but Fed. comments eagerly awaited
Sterling reaction to be significant
First, the reaction of Sterling. Will there be a significant rally? If so will it be across the board, or far stronger versus the euro which is on a clear and certain monetary path? Second, what will the justification of BoE Governor Mark Carney be to any hike? It will presumably inflation based despite a more logical reason being the protection of the currency although the two are linked.
I am still very surprised to be writing, at this point in both the economic cycle and Brexit negotiations about a hike, and my reasoning would be that to hike now only to cut in January if a hard or no-deal Brexit becomes inevitable, it will possibly influence inflation in the short term and protect the pound somewhat were Brexit talks to “go south”.
The inflation reasoning may seem a little spurious since prices, while not under control, have certainly been less volatile. For once the speech following a hike is going to have more effect on traders thought process than the hike itself.
Yesterday, the pound rallied against a dollar which is in a corrective phase, rising to 1.3153 before closing lower at 1.3133.
Euro rally “technical” as ECB retreats to the Med
It is a time for reaction and Mario Draghi and his colleagues can be content with how 2017/18 has gone, their gentle touch and hands-off approach has been just what the economy needed.
They have little interest in Trumpesque bluster over monetary policy or the level of the currency, just a determination to ensure a “level playing field” for all members of the Eurozone which have entrusted their monetary policy to a central body.
The level of the currency is significant to the ECB but mainly in order to ensure that exporters can remain competitive allowing every economy to grow. The policy is like what Spain and Italy used to do pre-Eurozone. When their economies were struggling for growth, they would effectively devalue and export their way back to health.
Yesterday, the single currency rallied a little reaching 1.1720 versus the dollar and 1.1205 versus Sterling. There was no single reasoning for this rally, it was simply flow of market orders from those buying goods from Europe.
Dollar falters a little but path higher is clear
With monetary policy very clearly helping the dollar and unlikely to change despite the President’s protestations, the one cloud on the horizon are the midterm elections that take place in November. The Republican Party has control of the Senate and House of Representatives, but this has not made it plain sailing for a deeply divisive President who has little allegiance to “cast in stone” political affiliations.
However, that could all change come November when there is a real possibility of the Democrats gaining control of the Legislature.
Thus far in 2018, and quite rightly, the dollar has danced to a monetary policy tune, since it is that which drives and adds or removes value from the currency. The adage that the Republicans are good for the dollar and Democrats bad has been consigned to the history books.
The dollar index fell yesterday, making a low of 94.26 before closing ten pips higher. This week’s Fed meeting is unlikely to have much effect unless Fed Chair Jerome Powell chooses to counteract recent comments concerning the dollar and monetary policy.
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.”