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July 2016

US economy doesn’t need rate hikes

Published: Thursday 14 July 2016


  • US economy doesn’t need rate hikes
  • Aussie unemployment rises

We have had a few momentous days in the past three weeks and yesterday was another of those. The change of Prime Minister brought the UK its second female incumbent and Theresa May started to form a cabinet immediately. George Osborne is out, Philip Hammond is in, David Davis is in to head the Leave team and into the Foreign Office comes Boris Johnson; arch Brexiteer and eminent gaffologist. It will be very interesting to see how that pans out in the years of negotiation ahead.
 
The markets loved the re-establishment of some sort of order at the head of the British government and Sterling had a rather splendid day; stabilising after a small recovery. Traders are though, braced for the Bank of England decision which will come at noon in the UK. Will the small recovery in the Pound delay the bank’s decision on interest rate cuts or will they; for once in their independent lives, act pre-emptively? We don’t know but a 25 basis point cut appears to be priced into the Pound at this stage so only a more radical 50 BP cut to 0.0% would weaken Sterling significantly. Whatever happens, the Pound will be volatile this morning and even more so this afternoon if the Bank gets all radical on us.
 
The US Dollar is relatively sanguine after the publication of the Federal Reserve’s regional report, the Beige Book. I think they call it Beige because it is always full of words like ‘moderately’ and ‘somewhat’. Aaaanyway, this one produced a vision of an economy that is growing moderately but with benign inflation and really showed no urgent reason for an interest rate hike in the US. The nervousness over the Brexit vote should keep things moderate for now and that is likely to keep the USD somewhat contained. OMG they’ve got me doing it now. The current range is 1.30 to 1.33.
 
We heard overnight that Australian unemployment rose slightly last month but inflation expectations also rose. That isn’t a nice combination of factors for anyone; not least the Reserve Bank of Australia. Higher inflation suggests higher interest rates might be in order but the overly strong Aussie Dollar and the nervousness over global commodity demand suggest a rate cut might be necessary to stimulate the economy. I have a coin they can flip if it would be helpful. The Australian Dollar weakened a little on the news, as you might expect but remains low ahead of the BOE decision.
 
And the Sterling - Euro exchange rate is off its highs as well. The resignation of the Chancellor threw another element of uncertainty into the mix ahead of the BOE decision but the Pound has recovered a little this morning. The current range appears to have established itself between 1.18 and 1.20...for now.
 
Theresa May’s husband, Phillip walked with her into 10 Downing Street and the twitterati have gone wild with ironic comments about his sexy blue pinstripe suit being ‘so on trend’ and comments like ‘who was Phillip wearing’ or ‘OMG, love his shoes’.  With SamCam gone, it was inevitable Phillip. Just work it...er...PhilMay.
 

Boris Johnson Quotes

The dreadful truth is that when people come to see their MP they have run out of better ideas.

My chances of being PM are about as good as the chances of finding Elvis on Mars, or my being reincarnated as an olive.

My friends, as I have discovered myself, there are no disasters, only opportunities. And, indeed, opportunities for fresh disasters.


Today's Major Economic Releases 

 
Market BST Data/Event Previous Expected
GBP 12:00 BoE: MPC policy summary    
GBP 12:00 BoE: Official bank rate 0.50% 0.25%
GBP 12:00 UK: Asset purchase facility 375b 375b
CAD 13:30 Canada: NHPI m/m 0.3% 0.2%
USD 13:30 US: PPI m/m 0.4% 0.3%
USD 13:30 US: Unemployment claims 254k 263k
USD 13:30 US: Core PPI m/m 0.3% 0.1%

FX Research by David Johnson

Daily Currency Analysis with Chris Verdet

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