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June 2017

Sterling spikes after Carney’s comments

Published: Thursday 29 June 2017

  • Sterling spikes after Carney’s comments
  • Euro remains the strongest currency this week
  • US Final Gross Domestic Product (GDP) this afternoon
By Killian Greenwood
The Pound strengthened broadly yesterday, after Mark Carney’s comments at a European Central Bank (ECB) forum. He said that interest rate rises will be "necessary" if the global recovery spurs an investment revival and leads to stronger wage growth. He added that the global recovery was becoming "broad-based" and that "some removal of monetary stimulus is likely to become necessary if the trade-off facing the Monetary Policy Committee (MPC) continues to lessen and the policy decision accordingly becomes more conventional”. Only last week, Governor Carney played down risks of a near term hike, given weak consumption and low wage growth. This was a dramatic U-turn and the market was clearly caught short.
The Pound strengthened, most notably against the US Dollar. It was the largest gain against the Dollar in over two months and the 1.3000 level looks likely to be tested over the coming sessions. With weak growth expected in 2018, the chances of aggressive hikes are slim, however, the Bank of England (BoE) will probably be pleased to see the Pound off its lowest levels, easing the burden on importing inflation via the exchange rate.
In the US, there is increased uncertainty on a September Federal Reserve interest rate hike. The US Dollar has weakened as Donald Trump’s administration struggles to undo Democratic former President Obama’s signature legislative achievement. The Republicans abandoned plans to get the Healthcare Bill passed this week and a vote may not come to the house until as late as August. This is a huge blow to the President’s agenda and has led to some to question if any of Mr Trump’s economic policies will come to fruition. The US Dollar continued to fall as the International Monetary Fund (IMF) lowered the US growth forecast after removing the "assumed fiscal stimulus". Federal Funds Futures are pricing in less than a 20% chance of a rate hike in September. It will now very much depend on the second quarter data set, due to be released in July.
ECB Chief Mario Draghi's comments from Tuesday led to the Euro’s one-year highs against the US Dollar yesterday morning of 1.138. The single currency suffered some jitters on reports that markets misjudged ECB President Draghi’s hawkish comments, however, traders quickly turned to the bigger picture that the ECB is, nonetheless, in a transition phase into stimulus removal.  Forward guidance has been at the forefront of central bank policy for quite some time and it’s clear that policymakers are beginning to warn the market that the era of cheap money may be coming to an end. However the ECB is not going to raise rates any time soon and the reduction of bond purchases may depend on the strength of the Euro. The EU economy is certainly strengthening, though, and the Euro remains the strongest currency this week.
Today is fairly light on the data front, with only UK mortgage lending due this morning and US jobless claims and the final reading of GDP this afternoon.

A gift

I bought my friend an elephant for his room.
He said "Thanks."
I said "Don't mention it."
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