The big news last week was Wednesday’s US Federal Reserve (Fed) monetary policy announcement, which was a touch more dovish than markets had expected. Consensus was that Fed Chair Janet Yellen would follow Bank of England (BoE) Governour Mark Carney’s lead and hint a rate hikes in the late 2014. That however was not the case. While forecasts published by the Fed showed that it expects the policy rate to grow at a faster rate than was previously communicated, those hikes are still not expected to start until 2015. Also, the Fed lowered its long-term target interest rate to 3.75% from 4.00%. Yellen did however slash another USD 10-billion off of the Fed’s QE program. Meaning that there is only USD 35-billion per month remaining in the program; which, at this rate is expected to be wrapped up by the end of the autumn.
The Fed activity drove US-Treasury yields lower, which in turn put the Greenback on the defensive. While this unexpected dovish turn from Yellen presents USD buyers an opportunity to lock in a favourable rates, the Fed is still on pace to increase rates on the 9 to 12 month time horizon. When newspaper headlines start to take notice of that, the USD is likely to make big gains, especially against the Euro, which has looked shaky since the European Central Bank (ECB) loosened monetary policy earlier in June.
Forgive the pun, but it’s been a sterling week for the British Pound as complimentary external factors line up with a refreshed domestic optimism to overcome a disappointing UK CPI result. Data on Tuesday showed that last month CPI grew at an annualized rate of 1.5%, its slowest pace since November 2009. However markets were quick to move on (forget) in part due to comments from various members of the BoE that interest rate hikes may occur sooner than financial markets had previously priced in. This mirrored similar statements made last week by Mark Carney and put the British unit offensive.
GBPUSD, aided by this week’s dovish Federal Reserve activity, grinded its way to its highest level since October 2008. After getting turned back from the 1.70 area in early May, the pair is testing those waters once again. Sterling strength has extended to GBPEUR also, which moved up to fresh 16-month highs as the pair tests the 1.25 area. Going forward diverging ECB and BoE policy is positioned to support this pair. Historical resistance from August 2012 in the lower 1.26 handle is the next level to be conscious of.
There’s a decent amount of potentially market moving data this week out of both the Eurozone (EZ) and UK. The greatest anticipation amongst investors however seems to be surrounding Tuesday’s BoE inflation Report hearings; at which lawmakers in Britain will have the opportunity to cross examine BoE Governour Mark Carney and his team on monetary policy. Markets tend to latch onto this event in hopes for an indication of what future policy changes are in the pipeline. This in turn could lead to elevated rate volatility in currency markets.
At a recent speech Carney mentioned that interest rate hikes “could happen sooner than markets currently expect”, as such it seems likely that discussion of rate hikes will take center stage on Tuesday. Also look for some mention of this week’s soft UK CPI data, the state of the London housing market, and personal debt levels.
Following the Inflation Report hearings by a couple of days is the BoE Financial Stability Report. The report is a more geared towards financial services regulation than policy, however it’s another opportunity to engage the Carney. Thus it’s another opportunity perhaps glean some insight into the future of British monetary policy.
Looking to the EZ, Monday sees a host of Purchasing Managers’ Index (PMI) results published. The French numbers will be heavily scrutinized in particular given that last month’s results dropped below the critical 50.0 threshold. A reading above 50.0 signals expansion in the industry and below suggests contraction. Then on Tuesday German Business Climate survey results are released, expectations for which are 110.2 against last month’s reading of 110.4. In light of the disappointing Economic Sentiment Index data this week (29.8 actual versus 35.0 expected) investors will likely be sensitive to a loss.
Further reading: Summertime, and the tradin’ is easy
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