Single dissenter pushes pound higher
An entirely predictable single vote in favour of a rate hike at this week’s MPC meeting gave the pound a welcome boost.
Sterling closed the week at 1.2396 a rise of close to 2% vs dollar.
Kristin Forbes, an independent member of the MPC voted for a hike in rates. Her more hawkish views are well known given the number of comments she has made in the press regarding inflation and a concern that the Bank of England is falling behind the curve.
As Ms. Forbes is leaving her position on June 30, it was entirely predictable that she would do something more than provide soundbites.
A protest vote? A futile gesture? Possibly, but it showed that despite predictions of another major fall following the triggering of Article 50, currencies are driven by interest rate differential more than any other factor. Economic data is merely a combination of factors that lead to rate decisions.
Next week sees the release of three of the major contributors to such decisions: inflation, retail sales and producer prices.
FOMC rate decision attracts profit taking.
An almost counter-intuitive act was the fall in the dollar following the interest rate hike announced following the meeting of Federal Reserve Governors this week. The dollar had been gradually climbing in direct correlation with the rise in certainty over a rate hike.
Once the decision had been made, traders either exited their long dollar positions or created new shorts in a classic “buy the rumour, sell the fact” motion. Adding to the correction is the disappointment that the Fed remains within a “three hike” strategy.
The Fed. Chair, Janet Yellen in a speech next week will probably provide “advance guidance” on the Fed’s outlook. The number of hikes in the calendar year is a pretty meaningless statistic and as a counter to inflation it is more relevant to use a twelve-month rolling basis of how many hikes in the year following the latest hike. This is pertinent since central banks tend to use trends over a twelve (or 24) month period to determine monetary policy.
The dollar fell by close to 1% over the week against a basket of the currencies of its major trading partners.