Monetary tightening suddenly en-vogue.
As Central bankers, Mark Carney and Mario Draghi fit the bill perfectly. Calm under pressure, very much “their own men” and prepared to take tough decisions, they are worthy leaders.
It is perhaps poignant if not particularly significant that Carney chose a speech at an ECB conference to accept that the time for a rate hike in the U.K. has finally arrived. His comment that a rate rise is probably necessary and the MPC would discuss it in the coming months was the perfect response to the growing clamour since the 5-3 vote at the last MPC meeting.
Sterling rallied to reach close to 1.3000 versus the dollar and managed to break back through the 0.8800 level against the euro, despite the common currency’s recent strength.
It seems that no matter what drivers are the current favourites of the market, traders cannot avoid interest rate differentials as the No.1 factor.
Given the length of time that we have seen ultra-easy monetary policy and never seen stimulus packages it is good to be able to say, “The Crisis is Over”! If Carney and Draghi believe it, it must be true!
Sterling rally to aid long term inflation fears.
A lot has been written about the fall in sterling since the Brexit referendum vote more than a year ago and how producer prices, in particular, have been affected, rising 20%+ YoY in the spring.
As we reach the end of H1 ‘17, sterling stands a little over 8% higher than it did in January against a dollar which has been aided by three rate hikes during the same period.
Nothing much is yet being said but the positive effect on inflation when coupled with the coming tightening of monetary policy should see further advances. The positive effect of lower inflation on real wages will also drive a brighter H2.
Brexit is clearly the “elephant in the room” and there will be bumps in the road as the major points are discussed. There is a growing realization that despite its gaining the initiative in Brexit talks following the political upheaval in the U.K., that the EU needs to be a little more conciliatory in its attitude to several major points.
The “summer lull” will soon be upon us and provided the Government remains in place a consolidation of Sterling’s recent gains is likely.
Next week’s data releases likely to set tone
It seems a long time since the market was driven by data as opposed to political or monetary policy factors. With the new month comes EU unemployment, EU and U.S. activity indexes, the U.K. NIESR GDP estimate and finally, the “big one” U.S. employment. Throw in U.K. inflation hearings, a rate decision in Australia and FOMC minutes and it could be a busy week!
The U.S. employment report still “reigns supreme” as the most eagerly anticipated monthly data release. Its interpretation when broken down is a microcosm of each subsequent report. It has become seemingly less reliable over the past year or so. As the economic picture becomes clearer and stimulus is removed we will see a fairly consistent vision of employment which will lead the market to look elsewhere, probably at interest rate differentials for inspiration.
As three major central banks turn to a hawkish or at least “balanced” bias, interest rate differentials and the relative pace of rate rises will be the significant driver.