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Hawkish Carney hides Brexit fears

Mark Carney the Governor the Bank of England must have been a relieved man following his press conference yesterday. He has managed to convince traders that the Bank of England will embark on a series of rate hike that will be faster and larger than had been expected. This may not, of course, be nonsense but Carney’s other magic trick was to manage to completely avoid the “elephant in the room” in the shape of Brexit.

The rise in Sterling over the past few months has not apparently had any major effect on inflation. This is odd given that Sterling’s precipitous fall following the Brexit referendum in June 2016 was the main reason for inflation rising to a peak of 3.2% since.

Sterling had “one hell of a day” yesterday, rising and falling very fast and aggressively but ranges were kept in check by ample liquidity. The flight to safety engendered by the continuation of the equity market correction drove Sterling lower later in the day. Next week’s inflation data in the UK will make interesting reading as the market comes to terms with a new, more hawkish, Bank of England.

Draghi content to remain in the shadows.

The major, yet unlikely beneficiary of the recent turmoil in equity markets has been the ECB who have been vindicated in their lack of action over monetary policy fearing driving an already buoyant common currency even higher.

Draghi managed to avoid the subject of the Asset Purchase Scheme completely at his latest press conference and with the Euro trading at 1.2270 he can breathe a sigh of relief that the Euro wasn’t three or four big figures higher following any hawkish comment.

The ECB which will see the release of Eurozone wide Q4 GDP data released next week is content to remain in the shadows of global economic policy as it strives to ensure reliable self-sustaining growth across the entire region.

Germany however may want to “call out” the ECB next week depending on just how out of hand inflation has become as it releases it CPI data on Wednesday. There may be no love lost between BUBA and the ECB on Valentine’s day!

The agreement on the Grand Coalition in Germany means that the Germans can return to the head of the EU table following a prolonged absence which has allowed French President Emmanuel Macron to promote his agenda for greater unity.

Dollar index recovery continues

Despite the market searching for safe haven in the JPY and CHF, traders were happy to buy dollars yesterday despite the correction ion equity markets starting again. With the Dow Jones Industrial Average losing another 3.75% yesterday the dollar index rose to a high of 90.57 before falling back to close virtually unchanged.

The outlook for interest rate hikes in the U.S. is still unclear as new Fed Chair Jerome Powell is yet to make a major speech since his low-key swearing-in.

The Fed remains in a three-hike strategy for 2018 matching the strategy for the twelve months to December. The strong versus weak dollar discussion has been kicked down the road for now although any further signs of currency manipulation from Asian countries will draw the ire of President Trump.

The explosive nature of 2018 so far has brought opportunity to traders to make money if risk and money management techniques continue to be observed. Volatility within tight ranges is the trader’s utopia. It is likely that further volatility will be several drivers remain in focus, in particular; Brexit, equity markets, the Fed Funds rate and an Italian election for good measure.

 

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