Three dissenters vote for hike

Following recent inflation data concerns had been surfacing that the Bank of England’s Monetary Policy Committee had been “hiding behind” the fall in the pound as a method of avoiding a rate hike.

There is a clear dilemma facing the MPC since inflation is now approaching 3% and is likely to surpass that level next month. However, the economy is slowing, GDP was just 0.2% higher in Q1 ‘17 and real wages are actually falling for the first time since 2014.

At yesterday’s MPC meeting there were three dissenters, each voting for a hike in rates. Kristen Forbes, attending her final meeting, was joined by Ian McCafferty and Michael Saunders.

In April, Saunders made a speech in which he saw continued growth for the U.K. economy. He saw weaker household spending being offset by growth in business investment and exports. Export growth has been aided by the weaker pound and it is yet to be determined the full effect of Brexit on the economy.

Nevertheless, the MPC needed to be seen to be acting particularly, as already mentioned, since real earnings are falling.

Sterling continues to be supported against the Euro on approach to 0.8800 and recovered following the MPC vote to reach 0.8720.

FOMC credibility faces examination

Yesterday’s data releases in the U.S. provided some relief to the FOMC who may be feeling a little beleaguered following their decision to hike rates for the third time this year earlier in the week.

The dollar index which compares the value of the dollar against a basket of its major trading partners currencies rose to test resistance at 97.40.  

Traders are now looking towards FOMC actions over the remainder of the year since the base case in January was for three hikes over the whole of 2017.

Anticipation over President Trump’s fiscal and economic stimulus plans as being a panacea for an economy which is performing moderately is fading. Since the Comey testimony, Trump has been “conspicuous by his absence” both in person and on social media.

Interest rate futures are predicting a 30% chance of a further hike but this will now depend on the performance of equity markets. Fed Chair Janet Yellen echoed Alan Greenspan’s 1996 “irrational exuberance” speech showing concern over “asset bubbles”.

Eurozone basking in figurative and literal summer

ECB President Mario Draghi must be looking forward to his summer holiday more this year than he has for years! The Eurozone seems to have emerged from the Monetary crisis with the least damage overall. Just don’t say that too loud in Athens or Nicosia!

Inflation is well controlled; the currency is recovering and growth is starting to become self-sustaining.

Sr. Draghi has voiced concerns over inflation being benign but his “wait and see stance” is being welcomed by the markets who approve of his actions.

A reining in of the Asset Purchase Scheme will be needed as a first step to normalizing monetary policy. It seems that despite being the last Central Bank to “take the plunge” they will emerge the most unscathed both in terms of perception and reputation.

The common currency is reaching an overbought state and a correction is likely to be needed to push through 1.1300 and 0.8820. It has already broken higher against the JPY and is consolidating before a test of 126.00 then 128.00

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