MPC split widens
Outgoing MPC policy hawk Kristen Forbes couldn’t resist a final salvo over interest rate policy as her term as an MPC member ends. In a research paper, she voiced concerns that the UK economy was suffering lasting damage from the fall in sterling. Governor Mark Carney probably feels that this “parting shot” is a case of fitting the evidence to both her recent voting actions and a justification of her outlook.
The MPC was formed to have an informed yet diverse outlook - so that is what the government is getting!
Forbes’ replacement is Professor Silvana Tenreyro, a Harvard Ph.D. She has worked with both the Federal Reserve in Boston and Banque de France.
During a period as a member of the MPC of the Central Bank of Mauritius, she was considered a dove. It is doubtful that that experience can be considered when judging her voting intentions in her new position.
Andrew Haldane, the Chief Economist at the Bank of England and a voting member of the MPC, has turned a little more hawkish in his view of the UK economy. He believes that a rate hike can be tolerated and signalled his intention to vote for a hike once the “political dust cloud” has settled.
Politics creates short term pain
It is never a clever idea to allow the market to interpret political issues as a driver of currencies. The result tends to be inconclusive at best, given opinion bears a major influence.
Good old economic data using past performance as an indicator for future outcomes suits dealers far better. Take the US employment report as a prime example. This is a notoriously fickle report often being adjusted the following month by up to 25% in either direction. Yet the Friday afternoon on which it is released is often the single most volatile trading period of the month.
Plenty of traders can be heard to say, “I never trade the employment data” or “why open yourself up to being whipsawed”. Nevertheless, someone is trading because volumes are also often the highest in the month.
Since the first Friday in July is the 6th, despite the US holiday on the 4th, it should be hoped that the extra time will allow for more accurate data. We will see.
Before that event, we have two more weeks of minor data releases interspersed with huge dollops of political wrangling
Currencies remain in well-trod ranges
The pound tested the bottom of its recent range on Wednesday as BoE Governor gave his opinion on why interest rates need to remain on hold in the UK. Yesterday, in response to more “hawkish” comments, it managed to rally against both the dollar and euro. It reached 1.2740 and 0.8770 moving away from resistance levels that have held well.
The jury is still out on the UK government’s new “soft-Brexit” approach but Theresa May’s olive branch regarding EU nationals resident in the UK has been well received as a good starting point.
The dollar index which has been in the doldrums has recommenced its rise reaching 97.87 before a shallow correction.
Risk appetite appears neutral as denoted by the performance of the JPY and CHF both of which appear to be waiting fresh impetus before resuming their trend.
Oil rebounded a little but remains a victim of excess supply despite OPEC’s best efforts. Brent rose to $46.75 a barrel before falling back below $45.00