Sterling remains pressured

Growth forecast cut by Central Bank

Yesterday’s Monetary Policy Committee meeting was supposed, until a few weeks ago, to raise short term interest rates and verify market expectations that a hike would provide further support to the fight to lower inflation. Not only did Governor Mark Carney pour cold water on that notion, completely shattering the illusion that a hike made economic sense, but yesterday he announced that the Bank of England had cut its growth forecast casting doubt on any future hikes as well.

In his press conference, Carney commented that the Bank will “wait out” a period of economic weakness he prefers to blame on the unseasonal weather seen towards the end of Q1. He remains stoically neutral about the Government’s handling of Brexit so must dig deep into his bag of excuses to avoid comment on that subject.

Inflation and employment reports are released in the U.K. over the next two weeks and it is probable that the fall in price rises will have stalled given the rapid decline seen in Sterling over the past month or so. The growth of wage increases is likely to have continued, which is further testament to the fact that the Bank’s hands are tied.

The market took the news in its stride although the pound did close lower on the day at 1.3519 recovering from a low of 1.3460, while versus the Euro it fell close to its recent low closing at 1.1343.

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Dollar corrects as rate expectations diminish

It is a popular belief that the FOMC doesn’t use CPI data as its measure of inflation preferring personal consumption as it feels that gives a more “real-time” read.

As far as the market is concerned, inflation is inflation and any measure they see can be used to provide confirmation or otherwise of the Fed’s intentions.

Yesterday’s release of CPI data was lower than had been expected leading traders to shelve ideas that the Fed would hike rates more than the twice more this year that they have already indicated. The markets expectation was for inflation to have risen to 2.2% so the 2.1% rise in consumer prices in April was only marginally lower than expectation.

Jerome Powell, the Fed Chairman, has a growing reputation for only dealing in fact so it is to be expected that they could fall a little behind the curve, something the market hasn’t seen ion many years if ever.

The dollar index corrected a little from its recent steady climb making a low of 92.53 in reaction to the inflation data. It recovered a little, closing at 92.72. The next resistance at 93.50 now looks a long way away.

Euro finally turns north

The single currency has had an odd week. It broke through what has been strong support at 1.1880 making a fresh low for the year at 1.1822 but traders have appeared reticent to sell at these levels with only weak longs being flushed out. It is as if it is an affront to the ECB to sell at these levels in the knowledge that the Central Bank is unconcerned and won’t do anything to strengthen the currency either verbally or physically.

It is too early to “call a bottom” for the Euro since in remains reactive and the unpredictability of a greenback which is driven predominantly by events outside U.S. borders could mean another test of the low.

The political situation in Italy could also provide some material weakness for the currency as the two significantly anti-establishment parties make positive steps towards forming a Government. This will be a major worry for Brussels and Italian bond yields are beginning to rise as the market also signals its concern.

The Euro rallied on the back of the reaction to U.S. inflation data rising to a high of 1.1947 before closing a little lower at 1.1915. The chart at least saw a welcome black number after the recent sea of red although that could be short lived and a rare sight indeed!