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July 2017

Sterling recovers on Quantitative Easing unwinding suggestion

Published: Monday 14 August 2017

  • Sterling recovers on Quantitative Easing unwinding suggestion
  • USD weaker as Federal Reserve Chief downplays rate hike expectations
  • Bank of Canada raises base rate unexpectedly
By David Johnson
Yesterday, Bank of England (BoE) Monetary Policy Committee (MPC) member Ian McCafferty urged other members of the MPC to start unwinding some of the bank’s quantitative easing (QE) budget. They currently have £435 billion worth of assets that they could begin to sell if they heed his words. QE injected funds into the markets, so unwinding that plan sucks money out of the economy and that is another way, other than pure interest rate manipulation, to tighten monetary policy. The timing and pace of that unwinding is always going to be controversial, as is any interest rate hike.
With yesterday’s Unemployment figures being positive once again and wage growth rising to 2.0%, there is going to come a time quite soon when the BoE has to act, but the threat of Brexit damage is always going to be at the back of the committee member’s minds. Nonetheless, Sterling rebounded quite healthily after all that news and the Pound remains positive this morning.
Across the Pond, the head of the US Federal Reserve, Janet Yellen, spoke to Congress and made the point that US rates would not have to rise much further to reach a level of equilibrium. That weakened the US Dollar and allowed the Pound and Euro, amongst others, to make gains against the USD.
The other central bank in action yesterday was the Bank of Canada. They took the markets by surprise when they raised their base rate by 25 basis points to 0.75%. In historical terms, this is still very low, but the differential with other countries does make the Canadian Dollar relatively more attractive and, as a consequence, the Canadian Dollar gained about three cents against the Pound on the news before giving back roughly half of that gain this morning.
The Australian Dollar gained overnight after an index showed a significant uplift in consumer expectations of inflation levels. This is just a sentiment index, but the rise from 3.6% to 4.4% is worthy of note. And from China we had much improved figures on imports and exports. That too will boost confidence in the Australian economy, as China is Australia’s number one export market.
This morning brought a slew of inflation figures from across the Eurozone, but that hasn’t impacted the Euro to any great degree. We will get the Bank of England’s credit conditions report and, in amongst a bunch of lesser US data, we will get the second round of Janet Yellen’s testimony to Congress. Mrs Yellen is treading quite carefully, I suspect, because there is a lot of noise about Donald Trump not wanting to renew her tenure in the role.
And an 80-year old Chinese woman wanted to pray for good luck as she boarded a flight in Shanghai Pudong International Airport. As an offering of sorts to the aircraft she was boarding, she threw some coins into the engine. What she got was a safe flight, but five hours late, because the engine had to be inspected for damage and the coins recovered. So part of her wish came true at least.

Dumb steward

A new steward was on the flight and they had an overnight stop in Singapore before an onward flight in the morning. The Chief Steward showed the new guy the best place for airline personnel to eat, shop and stay overnight. The next morning, as the pilot was preparing the crew for the day's route, he noticed the new guy was missing. He sent the Chief Steward to find him. When the Chief Steward arrived at the hotel room, he asked a maid to open the door and found the new Steward standing there all ready to go but looking confused. “Thank goodness you’re here,” said the new man, “I couldn't get out of the room”. "Why not?" asked the Chief Steward. The new man replied: "There are only three doors in here. One is the bathroom, one is the wardrobe and the one you came through has a sign on it that says 'Do Not Disturb'." 

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