Sterling buys in to what Carney is selling
Sterling rocketed back quickly yesterday following a few days of losses. The crucial factor within this move is just how decisive and sustainable this move really is.
The catalyst was once again a speech by a Bank of England rate setter, in this case Governor Mark Carney. Having last week told us that the time for rate hikes was not yet here, he went on to say yesterday that “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.”
No change in BOE policy stance…yet
Having read through his comments I do not think that this materially changes much of the stance of the Bank of England however a continuation of this language will obviously increase market expectations that a hike is imminent. The Governor has not turned into a policy hawk overnight and certainly there has not been a slew of above consensus, rebounding economic data that can easily allay the MPC’s wider concerns over pay, credit, growth and investment.
Secondly we have to look at where the pain is coming from for the MPC and that is inflation. Much like we as consumers the Bank of England lives and dies by inflation and with CPI at 2.7% and still likely to rise a little further some members of the rate setting committee are getting a little antsy. I therefore think that a speech that in the short term may generate a little bit of sterling upside and, more importantly, some two-way risk in the pound, may be enough to quell consumers’ inflation expectations in the short term.
Sterling now has two way risk
The Bank can’t raise rates to fight inflation given how high credit levels in the UK economy are but neither can it be seen to be doing nothing. Dr Kristen Forbes who is leaving the Bank in a few days’ time told reporters a few weeks ago that some members of the Bank of England were more concerned with how they looked in the media than actual policy making. This may be a slight acknowledgement of that.
The speech has certainly thrown some volatility back into the mixer and markets will now have to treat each upcoming speech by a Bank of England policy maker as something that can easily generate two-way movement in sterling. Governor Mark Carney will be interviewed by Bloomberg at around 11am BST this morning so we could easily be in for another volatile afternoon.
ECB tempers market’s EUR optimism
At least our thoughts on the euro proved correct. As we noted yesterday, while we remain bulls on the single currency on the basis of stronger economic data and an eventual tapering of QE and interest rates we thought that the market may have read too much immediacy into Draghi’s comments on strengthening inflationary pressures. Yesterday, ECB officials noted that “what was perceived as hawkish was really meant to strike a balance between recognizing the currency bloc’s economic strength and warning that monetary support is still needed.”
The euro weakened but will remain close to these elevated levels as we believe that while a tapering of stimulus may begin by the end of the year the stimulus program may actually be extended further i.e. more stimulus but at a slower rate.
Overlaying all of this are inflation releases from Germany and the US this afternoon as well as the latest US GDP figures.