Rate Hikes not data dependent

In a speech yesterday designed to provide advance guidance not just for Fed actions in Q4 but going forward into next year, Fed Chair Janet Yellen confirmed that her colleagues on the FOMC believe that it would be irresponsible to wait until inflation reached 2% before acting. This will ensure that rate hikes remain gradual and the Fed won’t have to act aggressively in the future.

Several of Yellen’s FOMC colleagues have speeches planned this week but it is Lael Brainard, a permanent member of the committee who will attract most attention. Brainard will provide a contrasting view on inflation since she believes that its path could continue lower ruling out the need for another rate hike in the short term.

The dollar has started to rise against the common currency as political issues drag the Euro lower. The widening gap for monetary policy between most of G7 and the U.S should provide support until the end of the year at least.

Further support for the greenback could be provided by the release today of the first cut of the fiscal reform plans that have been worked on by Congress and the White House for the past six-months. If the President can drag himself away from his spat with Kim Jong-un long enough, he may be able to focus on a positive domestic issue.

Merkel on uncertain ground

Over the twelve years of her Chancellorship, Angela Merkel has had to deal with several issues not just for Germany but also for the European Union. During that time one thing that has remained constant is the support she has had from the German people. Her policies have driven Germany to be a major influence on global affairs and provided economic stability at home.

The result of the weekend’s election in Germany, while not necessarily providing a shock, since it is roughly in line with analysts’ predictions, is a major reality check for the direction Germany will take during what will certainly be her final term. The rise of the right wing and a nationalistic view could upset here totally pro-EU outlook and she may be required to change her open-door policy to immigrants and refugees. The one thing in her favour is that despite almost unbridled entry into the country the pressure on public services has been manageable and the unemployment rate remains low,

The common currency has fallen, predominantly against the dollar, but also reached a ten-week low against Sterling. This illustrates just how long the market had got and the fall still looks corrective in nature.

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Brexit splits widen in the U.K

It seems that Theresa May’s grand plan to produce a “Thatcher-like” speech in which she dominantly outlined her proposals for Brexit and Europe fell into line has failed dismally.

Donald Tusk the President of the EU council visited the Prime Minister yesterday and managed to pour cold water on any hopes she had that her words in Florence would be sufficient to allow phase-two of the negotiations in which the U.K.’s future relationship with the EU would be discussed.

The current level of Sterling is something of a fraud since the influences that have seen analysts call for parity against the single currency have simply been overshadowed for now by the German election.

Just how much longer May can survive is open to question. She faces her Party’s annual conference starting this week and the sound of sharpening knives is becoming deafening.

Just how she can unite the party behind her is almost impossible to countenance.

The opposition Labour Party is holding its conference this week and is “preparing for Government”. This may be a little premature but the “old Labour” mantra of more public borrowing, greater investment in public services and nationalization has returned to the fore. They are also planning for a run on Sterling should they be elected, hardly a glowing indictment of their plans.

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