Sterling at One Year High

Bank of England uses only available tool

The reality of just how much the Bank of England’s hands are tied over monetary policy was perfectly illustrated yesterday as MPC members voted 7-2 in favour of leaving rates unchanged. Despite this decisive result, the Governor Mark Carney in his press conference following the meeting warned that the Bank’s tolerance for above target inflation was fading and that rates could be raised “in the coming months”.

This is about as veiled a comment as you can get but it was sufficient to lead traders into the belief that it was perhaps time to take profit on their short sterling positions.

Carney told reporters that the MPC felt that the economy was performing as expected.

The emphasis of the Central Bank appears to have shifted away from the economic downturn to concentrate more on prices. This week’s data meant that the gap between wages and prices widened to close to 1% and this more than the headline 2.9% inflation rate has led to the change of mindset.

Sterling initially fell on news that the vote has been 7-2 with traders disappointed that Andrew Haldane had remained in the “no change” camp but leapt to a high of 1.3409 and has remained close to that level following the statement from Governor Carney.

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Euro support holding

The common currency has very strong support versus the dollar at 1.1820. This level proved hard to break during the rally. The extent to which traders divest their long Euro positions will determine the depth of the correction as the uptrend remains intact as nothing has changed fundamentally.

Given its rally by 16% versus the dollar and 10% against Sterling the only way the trend could continue was if there was a serious correction.

Angela Merkel remains well ahead in opinion polls in Germany and seems almost certain to win a fourth term in office. German politics is characterized by the performance of the smaller parties. In particular, there is concern over the rise of the far right AfD which could see a party with a nationalist agenda represented in the Reichstag for the first time in almost sixty years.

Part of the rise in the Euro had been due to the political stability achieved following the victories of pro-EU candidates in Holland and France.

With concerns, however slight, about nationalism in Germany and the Italian polls showing the opposition Five Star party leading, a return to political concerns could ignite further falls for the single currency.

Pyongyang provocation returns as it launches another missile

The determination of North Korean Leader Kim Jong-un seemingly knows no bounds as yesterday he promised to “sink Japan and turn America to ashes with a nuclear strike” following their support of stepping up of U.N sanctions.

He then launched another missile test which flew over Japan and landed in the sea close to the Japanese island of Hokkaido.

It is clearly now just the concern over the reaction of China and to a certain extent Russia that is holding back a first strike from the U.S and its allies in Seoul and Tokyo.

So far, the reaction of the markets has been muted since it seems that such provocation is considered a “storm in a teacup” and it will take an escalation, however that manifests itself, to drive buying of safe haven currencies.

The rally for the pound versus the JPY has been strong over the past few days with Sterling climbing by 6.5% since late August to reach 148.00

It remains to be seen what the reaction from Washington will be to this latest piece of provocation since it is highly unlikely that Kim’s end-game relies solely on rhetoric.