Yellen’s words proving prophetic
Macroeconomic data that consistently beats analysts’ expectations is a sure-fire path no a hike in interest rates no matter what the Central Bank says. It is significant that since Janet Yellen removed data dependency as a factor in a more proactive FOMC, the economy has seen above trend data.
The removal of additional stimulus will be a major test of monetary policy since no one really knows what the effect of the daring of so much liquidity no matter how slowly it is performed will have on the economy.
The dollar index in on an upwards path but faces tough resistance at 94.20 about 40/50 pips above its current level. Versus the single currency resistance is sited at 1.1680 and against Sterling, 1.3200.
Being the first week of the month, the U.S. employment report if due for release this Friday. Expectations are high given the strength of recent data releases. A headline number of 200k+ is the minimum now with 250k being mentioned in some places.
The talk of an agreement of fiscal reform seems to have faded into the background so further advances for the greenback will need to be driven by the economy.
Europe facing leadership issues.
It is yet to be seen just how the EU can cope with a sustained political crisis. Admittedly it handled the financial crisis very well as the likes of Mario Draghi and Wolfgang Schäuble stepped up.
The result of the Catalan referendum, legal or not, perfectly illustrates the level of patriotism that is prevalent in several regions of EU countries. It is ironic that in a region that seems to move at such a slow pace weighed down by bureaucracy, that it also tends to run before it can walk. The single market and free movement already in place in such a relatively young group shows its determination to rush headlong into a Federalization that everyone may not agree with. The French, traditionally radical when it comes to further harmonization are leading the charge through their new pro-European President.
It will take a feat of statesmanship to bring all twenty-eight remaining members into line with Macron’s proposals but given the economic success that is currently growing almost with exception no one would bet against a more integrated EU taking it place in global affairs.
May facing uphill task to provide unity and solidarity.
British Prime Minister Theresa May is facing yet another challenging situation as she tries to rally dubious party members to her neither hard nor soft Brexit agenda. Facing criticism from both sides Mrs May has chosen to try to “cherry-pick” ideas from both wings of the Party.
She is constantly facing questions over her relationship with and the performance of her Foreign Secretary, Boris Johnson, who continues to be the standard bearer for the non-negotiated Brexit where the U.K. simply ceases to be a member. It would be the ultimate calling of the EU’s bluff was the U.K. to walk away from the negotiations although the economic fallout would be close to catastrophic and would lead the MPC into mayhem.
While the pound remains in a relatively narrow range, traders are prepared to wait for concrete proposals from the Government but should it start to fall again, the pace of the drop could accelerate quickly and bring another bout of imported inflation pushing the rate rapidly towards 4%.
Versus the single currency, the pound has performed reasonably well recently remaining below the 0.9000 level which is psychologically important but technically insignificant. The dollar seems to be ploughing its own path again having emerged from a reactive few weeks.