Data proves BoE right
Morning mid-market rates – The majors
9th July: Highlights
- June data sees economy stutter
- Rate of economic improvement to slow
- ECB to allow slightly higher inflation
Infections rise, spending slows
While there is generally still a feel good factor to the removal of the last, but most significant, of the restrictions, people have become nervous.
This may be a natural reaction to such an unprecedented period as we have seen over the past eighteen months or so, but Chancellor Rishi Sunak is not going to be able to simply return to business as usual as he withdraws the support he had put in place.
It was always believed that there would be some bumps in the road, but what we are seeing is not material, but something of a crisis of confidence.
The bravado seen by shoppers rushing to return to shops when they reopened has worn off and been replaced by a feeling of people blinking in the sunlight, as the country emerges from a very dark place.
The most recent MPC meeting saw the Bank of England ask the market to show patience as expectations grew regarding the tapering of support measures.
Over the past few weeks, it has become clear that the economy won’t return to the way it was overnight, and the country’s finances are going to look fairly ugly for some time to come.
The chancellor, always with one eye on the economic benefits of any given situation, believes that there will be a three-billion-pound windfall from the Euros which may provide just the boost the country needs as the removal of lockdown follows Sunday’s final fairly closely. Indeed, the national hangover that will follow should England win will take next week to disappear.
Monthly GDP data will be released later this morning. It is expected that growth will have fallen on a month-by-month basis from 2.3% to 1.7%. While this is still a decent enough result, it illustrates perfectly what lies ahead for the country economically.
The pound drifted lower against a slightly stronger dollar yesterday. It fell to a low of 1.3742 but rallied towards the close to end at 1.3784.
Risk appetite fading globally
Earlier in the year, as the global economy was in the grip of a seemingly never-ending stream of bad news, risk appetite became the main issue facing investors.
As risk appetite waned, so the dollar became a safe haven. Then, the market began to believe that the recovery was on, and risk appetite improved, and the dollar slumped. Now the Greenback is in the thrall of the FOMC, and this situation is repeated across most developed economies.
The traditional market holiday period is almost upon us, and traders, following this week’s release of minutes from the latest Fed meeting, will feel fairly comfortable leaving the office, fairly confident that they will not miss the big announcement.
In keeping with both the ECB and Bank of England, the Fed has tempered its expectations a little over the past few weeks but has done it subtly in order not to spook the market.
It was fairly obvious that activity would taper somewhat following the almost euphoric reaction that was seen in response to the success of the various vaccination programmes.
Now, a less spectacular but equally vital period of activity will be seen until Central Banks are convinced that there are no surprises hidden in the darkest corners of the economy.
Yesterday saw weekly jobless claims rise for the first time in several weeks. Against an expectation of a headline expectation of 350k, there were 373k fresh claims. While this is by no means a disaster, it serves to illustrate that the recovery won’t be a one-way street.
The dollar index took the data in its stride. Yesterday, it rose to a high of 92.78 but ran into selling interest on the approach to resistance at 92.80 and settled back to close at 92.36
Lagarde announces a slightly less strict inflation target
Merkel may have been scrubbed off Weidmann’s Christmas card list after the Chancellor played political chess with his career expectations by backing Christine Lagarde for the ECB President’s in order to get her colleague and ally Ursula von der Leyen elected as EU Commission President.
Weidmann wouldn’t have held back on criticizing the outcome of the ECB’s strategy review, in which it was announced that the Bank’s inflation target would be slightly loosened.
At the end of the day, very little has changed in practical terms, it just means that Ms Lagarde has slightly more wiggle room.
The ECB has shifted to a symmetric inflation target around 2%, rather than that rate being an absolute. Lagarde has warned earlier in the week that 2% couldn’t be protected as a ceiling. Another comment that would have left Weidmann spluttering.
It is clear that the frugal five were forced to allow Lagarde to win this one as it was clear, she had the backing of several states, including Italy where Prime Minister Mario Draghi recently commented that inflation isn’t that high.
The market will see the move as a dovish shift, but it makes sense to make these targets a little less rigid in what are still uncertain times.
Lagarde went on to say that interest rates remain the Bank’s primary tool for managing the economy. This is a subtle reference to the still significant bond buying programme, which shows no sign as yet of being tapered.
Following the announcement, the euro which had initially climbed to a high of 1.1867 drifted back to close at 1.1845.
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.”