Ransquawk

Carney words have a ring of truth.

It seems that the Bank of England has more a necessity than a desire for a stronger pound as it is running out of tools to fight inflation. Last weeks “jawboning” has had no lasting effect and, if anything, more than the threat of higher rates may be damaging for the economy.

The futures markets still predict two rate hikes before Q4 but since that “cat is out of the bag” it has been factored in by traders who seem to need far less reason to sell Sterling than to buy it.

I remain in that group staying short below 1.3925, although I am wary of becoming “married to the idea” and therefore unreactive to a change in sentiment or any more tangible evidence.

Michel Barnier’s comments on the Brexit transition period have brought caution to those looking to buy Sterling but while there are no headline negotiations going on that familiar optimism starts to grow again.

Yesterday’s inflation report held a marginal surprise in that the headline rate of inflation remained at 3%. This was not a total shock given the hawkish comments of Bank of England. There seems to be a clear divide between monetary policy and Brexit developing with the Central Bank acting more in reaction to global economic events than what is happening domestically.

U.S. Inflation data brings more questions than answers.

Jerome Powell, the new Chairman of the Federal Reserve has begun his tenure by having to concentrate on the correction that is taking place in equity markets and ensuring that no systemic risks evolve. This is possibly no bad thing as it has taken the limelight away from his views of monetary policy and interest rates for which the market has, so far, put words in his mouth.

It is assumed that Powell will be more pragmatic, reactive and bring a level of subjectivity to the role preferring to act less pre-emptively. However, there is nothing other than anecdotal evidence to support this theory. Until we hear just how he intends to drive policy that creates low inflation growth, it will be assumed that what we assume is correct. It may be that he intends to be lower key than most of his predecessors as befits his background. We will have to wait and see.

We will also have to wait and see how the rate hike in December affected inflation. Today’s headline number is expected to show that inflation remains benign at 1.7% MoM a little lower than December’s 1.8%. This is unlikely to have any effect on the feeding frenzy that is developing around the timing of the next rate hike which is pencilled in for April.

Eurozone growth a testament to Draghi’s doggedness.

Today’s region-wide GDP data will show that the Eurozone is starting to grow at close to trend although it is likely that Mario Draghi will maintain that the growth is due to continued stimulation and will make the case for the Asset Purchase Scheme to remain in place.

It is hard to say what will be the catalyst for Sr. Draghi to agree that growth across the entire region is sufficiently self-sustaining for accommodation to be removed. His fear is clearly that removal of stimulus will have the duel effect of reducing liquidity and pushing the common currency higher, both of which could create a slowdown unless domestic demand is sufficient to cover any shortfall.

The Euro has been showing renewed signs of strength although it remains well below the 1.2520 medium term target for now. There is still nascent selling interest close to 1.2380 but the bias of the market remains balanced for now with very little in the way of stop losses to be sought out by voracious banks.

Today’s release of German inflation and GDP for the entire region will need to be considerably out of the recent range to have any effect on the Euro. Prices are expected to have risen in Germany by 1.4% unchanged from December and in line with market expectation.

 

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Ransquawk