Rate hike talk suggests rift

European Central Bank (ECB) Governing Council member Ewald Nowotny of Austria addresses a news conference in Vienna, June 8, 2012. REUTERS/Heinz-Peter Bader

It is hard to imagine why Ewald Nowotny, the Governor of the Austrian Central Bank and Member of the ECB Governing Council chose this week to make a speech in which he said that the ECB would withdraw the Asset Purchase Scheme this year and that would lead to a rate hike, initially of 20BP but as a prelude to a normalization of monetary policy.

It is likely that Nowotny, known as the most hawkish member of the Governing Council, was concerned that the markets were getting a little too complacent about a one way bet of the future path of Eurozone interest rates.

However, with inflation at 1.4% year on year and a few poor pieces of data released recently, it would appear to be hard to make a case for Mr. Nowotny’s ideas.

Mario Draghi will be making a speech later this morning and it is highly unlikely that he will feel the need to refer to Nowotny’s comments particularly as he is backed by the vast majority of his colleagues although with industrial production data which is due for release tomorrow likely to see a strong recovery from February’s weak report he may need the support of a speech tomorrow from Chief Economist Benoit Coeure.

Geopolitical issues to the fore.

If I were producing a film in which East and West come close to a shooting war, then I could do no better than base the antagonists on Vladimir Putin and Donald Trump. Neither has a filter, Putin appears to act with impunity While Trump shoots from the hip at every opportunity.

The issue of the Chemical weapons attack in Syria coming so close after the Skripal poisoning in the UK have ramped up tensions between the US and Russia by several notches.

The rush to buy safe-haven currencies continues although it has abated a little following China’s offer to open its borders to more imported goods.

The situation between the US and Russia is, however, potentially far more serious as neither leader is likely to back down.

Any further appreciation of the Yen will start to concern the Bank of Japan with major support at 105.20 likely to be tested should the situation escalate. The Swiss National Bank has been active keeping a bid under Usd/Chf recently but if we move to a new era of global tension and mistrust the 0.9200 years low may be tested.

Sterling rallies as hawk calls for rate hike.

It a trader sees a headline which says “MPC member calls for rate hike”, he (or she) is likely to buy Sterling without necessarily delving into the story to get the facts.

Ian McCafferty is, by some distance the most hawkish member of the MPC so when he commented yesterday that interest rates should be hiked at the next meeting on May 10th, it was hardly a surprise. McCafferty has attended 61 MPC meetings and voted for a hike at 15. The next most hawkish is his “partner in crime” Michael Saunders. He is a “new boy” who has only attended 15 meetings but has voted hike 5 times.

So, to say there may have been an over-reaction could be an understatement.

Let me confess, I have clearly underestimated the depth of sentiment supporting the pound and didn’t factor in the “April buying” where companies need to buy Sterling to cover dividend payments.

It now seems that the market is determined to test the 1.4230 resistance, but a lot depends on this morning’s data.

Longer term, I cannot get excited about the prospects for the pound until the Brexit agreement is published, and even then, the effect of Brexit on the UK economy is unlikely to be anything other than negative.


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