Inflation Concern drives MPC Split

Sterling testing resistance

In a move, which was neither expected nor of great significance, there was an 8-1 vote for rates to remain unchanged when be Bank of England’s Monetary Policy Committee met yesterday. There is still a long way to go before the MPC decides that conditions are right for a rate hike.

The one dissenting voice was that of Kristen Forbes, who has been vocal in her concerns over the risk that the Central Bank is falling behind as inflation continues to grow. Not only is it well known that Ms. Forbes is a hawk when it comes to inflation, she also leaves the MPC at the end of her four-year term in June.

Nonetheless, the pound rallied on this news, up by almost 1% to 1.2361 against the dollar and by a 0.5% against the Euro (which also had a good day!) to 0.8683.

The significance of this move is that traders are prepared to look beyond Brexit. When conditions dictate a rate hike is necessary, the market is prepared to take the MPC at face value.

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Data may provide further support

Next week’s data releases will drive the pound. The three main indicators of inflation; Producer Prices, Retail Sales and CPI are released on Tuesday. Should there be a further indication of inflationary pressure, the pound could easily test resistance close to 1.2500.

Since the Brexit Bill was passed into law yesterday, there is a real chance that the Government will Trigger Article 50 next week. This will lead to a chorus of wailing from “remainers” who see their last hopes of spiking public opinion disappear.

Economics and politics make a powerful and potentially explosive mix. It has been said before, but we could see the defining moments of the pound’s trajectory for the rest of Q1 decided in the coming days.

Sighs of relief in Brussels

The Dutch election result, in addition to be as predictable as analysts expected, was also a source of encouragement to the whole Eurozone. Incumbent Prime Minister Mark Rutte remains at the head of the largest party and his main rival Geert Wilders continues to be little more than an annoyance.

It is too early to pronounce the death of the populist/nationalist upsurge. By the same token, should the French vote in a similar fashion to the Dutch, then Brussels will be galvanized to move towards an even more Federalist position.

The entirely predictable actions of the Dutch voters remain in huge contrast to those of their French counterparts. The French are far more radical than the Dutch. The sheer unpredictability of the Brexit and Trump votes was what drove markets. So even if Le Pen were to be elected President, the fact that markets have recognised the possibility could dampen any major move for the currency.

The Euro was encouraged by yesterday’s news and bumped up against resistance against the dollar. Sell orders are very strong above 1.0800 and this level has proved to be a cap for the single currency since the turn of the year.

Dollar struggles as Yellen disappoints bulls

Those dollar bulls who expected, in addition to a rate hike, a particularly hawkish statement from Janet Yellen took out their frustration on the currency. The dollar fell against its main trading partners to 100.21. This is its lowest point since February 9!

The Fed. Chairman will make a speech next Thursday in which she will be expected to give her eagerly awaited advance guidance. It is doubtful she feels she will need redemption following the unexpectedly dovish press release after Wednesday’s FOMC meeting. For this reason, possibly attracting more ire from the President, she will be realistic in her view of the economy and the headwinds it faces.

It is surprising that traders consider the rate hike as equally important to short term direction as a mention of an update to the “three hike strategy”. Given that the Fed has raised short term rates twice already this year perhaps it is better to look at rolling twelve month periods than calendar
Years.