Interest rates in the UK were held on Thursday, with the QE programme also held at £375bn. The decision to keep rates on hold was one that has not come out of the blue. Previously, Mark Carney has spoken about potential hikes towards the back end of 2014 at the earliest but it would be no surprise if the first rate change was in Q1 2015, either way any initial rate hikes are likely to be both small and gradual. Interest rates have been at 0.5% since March 2009.
One side of the coin is that unemployment is clearly easing, with the rate falling to 6.6% in the last three months. The other side of course is the BOE’s need to manage inflation, currently at 1.5% as of May, but we do not want to see this disinflationary cycle continue much further.
There were concerns over the economic recovery on Wednesday following the biggest slump in 16 months from the manufacturing sector. The ONS report came in at -1.3% some way short of the 0.4% growth that had been forecasted. This saw both GBP/USD and GBP/EUR fall back below the respective 1.71 and 1.26 highs of recent weeks. Interesting for those clients who export, the figures also revealed that exports had declined since the first quarter of 2014.
This could be linked to the recent strength of Sterling, as whilst a strong Pound is great for those that import, it has the opposite impact for companies selling products and services overseas, adding weight to the need to use FX products with flexibility. Though these moves were short lived and Sterling quickly recovered it underlines just how fragile the economic recovery remains and that Sterling is still susceptible to retracements if data is negative. As it was, the market saw the Pound recovered quite quickly, but the warning signs should be heeded.
This week also saw the re-emergence of fears for the banks in the Eurozone with the Portuguese bank Espirito Santo having their shares suspended on Thursday afternoon following a fall in their share price of 17%. Concerns first came about at the end of 2013 which prompted the Portuguese Central bank to audit the bank. With Portugal one of the nations that were forced to take a bailout, this story will be closely monitored.
Looking ahead to next week, the markets will pay particular attention to the rhetoric used as Yellen, Carney and Draghi all speak before Wednesday. With the focus globally around interest rates any mention of rates will be scrutinised. On the data front the UK release PPI and core CPI inflation numbers, while the US will reveal its retail sales figures. As Sterling digests these data releases it will be interesting to see what the reaction is.
Guest post by Nick Colling of Cambridge Mercantile Group
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