Carney remains cautious on Brexit

It was only to be expected in an environment where just about every piece of data pointed to no change in rates that a rate hike has led to the currency depreciating by 2%!

The Bank of England’s Monetary Policy Committee voted by 7-2 to hike rates yesterday as doves Silvana Tenreyro and Gertjan Vlieghe decided that since it was to be a “one-off dovish hike” their consciences would allow them to agree. Initially the pound rose on what appeared to be a hawkish turnaround by two confirmed doves but that soon changed when Governor Mark Carney faced the press.

It became clear that this wouldn’t be the first in a series of hikes with Carney predicting just two 25bp hikes in the next three years. He said the pace of further rate hikes would be “at a gradual pace and to a limited extent”. This set the pound on a downward spiral which has set the tone for a selling into rally scenario where buying dips had been in vogue. The outlook for inflation has not greatly changed since the previous Quarterly Inflation Report and the MPC felt that it wasn’t going to fall unless there was some monetary policy assistance.

Brexit remains the prime concern

The MPC remains concerned about the continued effect of Brexit negotiations on the economy which is still suffering from the original decision. The rise in inflation is, according to Governor Carney, to be blamed wholly on the decision to leave the EU and the subsequent fall in the value of the pound. Business investment has suffered badly in the year since the referendum as SME’s consider how their markets will be affected.

Carney also mentioned the fact that employment is at a forty year high, (if you can believe the data!) and there are more people working in the U.K. than ever before. This is having a very positive effect on tax receipts which bodes well for a continued reduction in Government borrowing.

With Brexit negotiations restarting next week, the MPC may not have to wait long to see how they progress although the recent optimism, particularly concerning the start of stage two may be misplaced.

Now that the rate hike is out of the way, traders will concentrate on data releases and technical factors to determine the future direction for the pound. Carney provided advance guidance that inflation is going to be higher in October than September as the rate hike works its way through the system so real wages are likely to fall further.

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Trump picks Powell and market agrees!

After High Court Judges, the nomination of the Chairman of the Federal reserve is the most important recommendation the President makes. The selection if Jerome Powell as Fed. Chair has been welcomed by markets that were getting a little concerned over the rules based approach advocated by his opponent for selection, John Taylor.

Powell is likely to be a “safe pair of hands”, continuing the work of Janet Yellen in providing advanced guidance to the markets and a proactive approach where data dependency is for confirmation rather that creation of monetary policy. Powell is charged with the task of managing the reduction of emergency measures and ensuring that reduction does not harm growth which is starting to pick up.

Today’s release of employment data for October is likely to see a massive turnaround from September. Last month, 33k job were lost due to the effect of the Hurricanes which battered the south-western States. Analysts expect more than 300K new jobs to have been created although setting their sights so high can lead to unfounded disappointment. If the headline does breach 300k and can continue then the pace of rate hikes is sure to increase.

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