Carney joins Draghi in tightening camp

At the risk of getting a little ahead of itself, the market is starting to believe that the long drawn out period of ultra-loose monetary policy and additional stimulus measures is coming to an end.

The Federal Reserve was the first to expand its balance sheet and was the first to start the journey to a normalization. It is difficult to say if the FOMC were generally concerned about the economy or if it was truly a move designed to take the steam out of the stock market. Does the motive matter? Not really. A widening of interest rate differentials is a solid driver of currency strength.

Yesterday, Mark Carney the Bank of England Governor speaking at an ECB conference in Lisbon commented that the time is right for discussion of a rate hike in the U.K. It seems that he is starting to be swayed by inflation that is about to hit 3%. His Chief Economist spoke recently and said he is considering joining the “rate hike team” so that may also have been a major influence.

Draghi looking to rein in Asset Purchase Scheme

No more printing money?

It is significant that the three Central Banks embarking on monetary policy tightening are looking at it in a different way. The FOMC has hiked three times in H1’17 and hasn’t yet considered shrinking its balance sheet which has ballooned as “dollars have been printed” and assets purchased.

The ECB is, according to Mario Draghi, looking at reducing its Asset Purchase Programme which will lead to a tightening of money supply. Sr. Draghi is clear that he believes a rate hike will bring concern over the economy and create inequality leading to issues with some countries growth rates. He also believes that overall stimulus is good for the Eurozone at this stage of the cycle. Low rates aid borrowers and despite savings levels falling, he doesn’t believe that low rates have contributed considerably.

In the U.K., inflation is the major issue. Mr. Carney has believed “natural forces” will brink price growth back under control. That may be being seen as little more than wishful thinking but since Brexit negotiations have only just got underway and sterling is 8% higher against the dollar this year he is prepared to wait a few months.

Currency market starting to reawaken

Just as summer arrives, the FX market starts to receive stimulus from various classic drivers to encourage traders to drive currencies out of well-trod ranges. Politics, monetary policy and economics are the three fundamental analysis items that drive currencies. Technical analysis is a separate driver and it is always interesting to hear a conversation between a technically driven and a fundamentally driven trader. There will never be agreement!

Politics in the shape of the U.K’s Parliament is likely to remain a driver although yesterday’s win for the Government has taken the pressure off the Prime Minister a little. She is likely to survive until Parliament breaks for the summer but how strong her support is within her own party remains to be seen.

Also on the political agenda is the German election. This is almost being ignored since it has become a foregone conclusion that Angela Merkel will be returned for a fourth term. Just remember how many certainties there have been in elections in recent years.

Monetary policy has already been discussed but the pace of hikes is set to dominate as differentials grow and shrink.

Finally, economics. Next week sees important data releases particularly in the EU and U.S. The first week of the month brings manufacturing and services activity data from both and then the week culminates in the U.S. employment report. I don’t have an advance projection yet but I would expect the headline to be +180k new jobs.

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