Ransquawk

Sterling remains firm as rates set to rise.

There are none so blind as those who will not see!

Sterling fell a little yesterday following the release of the inflation report for March. However, it remains well supported as headline CPI falling to 2.5% was not considered enough of a fall to derail expectations of a rate hike to 0.75% at the MPC meeting on May 10th.

In fact, there is now talk of when the subsequent hike will be, and that date is November. With so much choppy water to pass under the UK bridge by then, it is impossible to say with any certainty that that could happen. Particularly as it will be a matter of months prior to the finalization of Brexit. The effect of the pound’s rally so far this year has been its positive effect of inflation.

When rates were hiked in November, Mark Carney, the Bank of England Governor commented that the rate of inflation “needed a nudge” from tighter monetary policy to see it fall back towards the Government’s 2% target. Well it has had that nudge, but it now seems that the MPC hawks believe it needs a firm shove which on yesterday’s evidence is hardly the case.

“Trump effect” most significant dollar driver.

The sheer unpredictability of President Donald Trump is now considered to be one of the most important drivers for the dollar. With inflation rising but very slowly and the rest of the economy improving, the FOMC can take its time of the need for rate hikes which points to a continuation of the three-hike policy that has been favoured by Fed. Chairman Jerome Powell.

With the airstrikes on Syrian chemical weapons installations being considered a success, progress being made over North Korea and trade concerns being dealt with behind closed doors, Trump’s foreign policy grudgingly seems to be working.

It seems that there are going to be face to face talks between Trump and Kim Jong-un but there is still major concern that Kim won’t give up striving for nuclear weapons and a long road remains. With the U.|S. treasury falling short of labelling China currency manipulator yet the spat between the two superpowers bubbling below the surface, some delicate negotiations are still needed.

The dollar index is hemmed in by concerns over the budget and trade deficits with long-term interest rates rising on one side and the rise in short-term rates providing support as differentials widen.

Liquidity; the markets’ friend and foe.

Just what is ample liquidity? It is a fine balance between what is being seen by the common currency right now where no matter what the market barely moves no matter what forces are seen developing and the flash crashes that have been seen affecting Sterling following the Brexit referendum decision.

As far as the ECB is concerned, market liquidity is a major tool in allowing it to concentrate on providing suitable conditions for the weaker Eurozone nations to grow without the concern that their products will be overpriced or that the currency will fall, forcing interest rates to rise to protect it.

The development of the Euro over the past twenty years or so has been characterised by the growth in liquidity which has meant that despite what has gone on economically, the technical ability of the currency to deal with the needs of nineteen diverse economies has been constant.

Prophets of doom (I was one) said one size couldn’t possibly fit all, but the way in which countries like Italy used to a high-interest rate high inflation economy have adapted has been miraculous. The single currency faces further hurdles going forward particularly in terms of very low inflation but one issue it won’t face is a lack of liquidity.

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