Dovish Rates and Brexit outlooks hit pound

Mark Carney the Governor of the Bank of England speaking in Washington at the International Monetary Fund yesterday took the steam out of the recent correction in Sterling by suggesting that rate hikes in the UK. aren’t as imminent as the market was expecting. This followed a decidedly hawkish MPC meeting last week backed up by a speech from arch dove Gertjan Vlieghe in which he seemed to advocate a hike.

Carney took the earliest possible opportunity to manage traders’ expectations for a rate hike, possibly as soon as November. He said that any hike in rates would be limited and gradual. A closer study of Vlieghe’s words show that although a departure from his usual downside concerns, he will only support a rate hike if certain economic conditions are met. There needs to be a closing of the gap between wages and inflation. This is characterized as the difference between domestic inflation brought about by economic activity, productivity and consumption and imported inflation due to the cost of imports from a weak currency.

A few analysts are calling for the pound to be allowed to weaken, despite its inflationary consequences, as they see the only way for the economy to avoid recession is to be able to export competitively.

May to bring leadership to Brexit negotiations

It appears that Theresa May has realized that since there is little happening in the U.K. economically, politically or socially that isn’t affected by Brexit she needs to take a direct role in the negotiations. This attempt to reassert herself is either in direct response to or has caused the action taken by her Foreign Secretary. Boris Johnson who decided to “break ranks” and release his own “Blueprint for Brexit” in which he confirms his “Hard Brexit” credentials.

Calling for a halt to payments to the EU as soon as Brexit occurs Johnson conveniently forgets the commitments made by the U.K. in various treaties. Whatever his intentions were in firing a shot across Mrs Mays bows, political commentators see it as the first shot in his leadership campaign. With the Party Conference less than two weeks away, delegates will be bracing themselves for the most fractious Convention since the days of Margaret Thatcher battling with “Tory wets”.

The Prime Minister will use a speech in Florence on Friday to announce a new role for herself in the Brexit process and possibly a breakthrough in the deadlock that has developed around the three primary demands that must be met prior to any discussion of the future relationship.

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Sterling correction slows

Mark Carney’s comments regarding future monetary policy and further Brexit confusion halted the pound’s recent correction in its tracks. Two of the four major British banks raised their year-end expectations for the pound but this failed to have any effect.

HSBC in particular was extreme in its change of prediction raising its forecast for the dollar from 1.2000 to 1.3500. This is a particularly reactive response to current market conditions and sheds no light at all on the bank’s real view of the market. It also removed its expectation for the Euro to reach parity. Again, not a particularly dynamic prediction given the correction that is taking place and the possible political headwinds still facing the common currency.

The pound fell back to 1.3465 and 0.8860 before stabilizing. It is a tough call to say that the correction is at an end but it seems that the positivity derived from the hawkish MPC meeting and Gertjan Vlieghe comments has now dissipated.

The FOMC meeting which concludes tomorrow would provide some advance guidance on both interest rates and the reduction of the Fed’s balance sheet. Any rate hike is out of the question given the benign inflation report that was released last week.

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