Data makes hike “certain”

Traders reaction to the probability of a rate hike in the U.K. next week considers only the fact of whether the MPC will raise or not and “glosses over” the motives for their actions.

The fall in real wages by close to 1% per month is undoubtedly the most important factor in the wavering support being provided by the consumer to the U.K. economy. However, the reason for the fact that inflation is now above 3% and likely to continue to rise, at least in the short term, is well known. The fall in the value of Sterling since the Brexit referendum has been the sole cause if higher inflation yet is the single item most concerning the MPC.

The MPC faces questions over the oversimplification of it decision making by trying to tackle inflation when it is business investment, decimated by Brexit fears that needs the most attention. Rather than looking at inflation in absolute terms it is better to concentrate on the gap between wages and prices. A rate hike, however small will, add to the interest rate burden facing SME’s who are already struggling and make their future even more uncertain.

ECB rate hike as far away as ever

There is a real possibility that Mario Draghi the ECB President will leave office at the end of his term in late 2019, never having presided over a rise in interest rates. His stewardship of the Governing Council the European Central Bank has been remarkable but, if it happens, that will be the statistic that follows him most closely.

Today’s ECB meeting will, as confirmed last month by Sr. Draghi, discuss the gradual withdrawal or tapering of the Asset Purchase Scheme put in place to combat the slowdown and lack of liquidity caused by the financial crisis.

The ECB were the last of the G7 Central banks to react by creating an extremely loose monetary policy despite the crisis threatening default by Eurozone members. Their reaction to withdrawal of the stimulus will be a little more proactive but they will still act cautiously aware of the possible effect of acting precipitously.

Today’s probable verdict will be a reduction in the size of monthly purchases but an extension of the overall term of the facility

The common currency remains in a relatively narrow range well above its support at 1.1680 versus the dollar but finding a break of 1.2000 equally tough.

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Trump continues to consider Fed Chair

President Trump’s intention when having lunch with Senators on Capitol Hill this week was to get their views on who should be the next Chairman of the Federal Reserve. Unfortunately, his visit, rather unsurprisingly, was overshadowed by an unseemly spat with two of his Republican colleagues both of whom were critical of both Trump the President and Trump the man.

For his Presidency to have any lasting positive legacy, Trump is going to have to find a way of working with Congress although given his personality, any compromises are less than likely.

The identity of the next Fed Chair has been promised for release before the President leaves for Asia in the first week of November which means the announcement is imminent. John Taylor remains the favourite to become the most influential Central Banker in the world and his possible appointment is having a positive effect on the dollar as he is the most hawkish of the candidates.

Today sees the release of preliminary Q3 GDP data with a drop from 3% in Q2 to something closer to 2.5% expected. This is unlikely to cause any fall in the confidence that the Fed will hike in December given Janet Yellen’s assertion that rate hikes are no longer data dependent since the Fed is in proactive mode.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.