U.K. Wage Inflation above CPI

Sterling Basking in glow of positivity

The pound has seen eleven positive days in the last fourteen as good news continues to push it higher. The significant break of 1.4000 versus the dollar earlier this week as been consolidated as consumer price inflation and higher wage growth have led to an expectation of a more hawkish statement from the MPC following their meeting later today.

Based upon data alone, conditions are beginning to appear that would need the MPC to tighten policy although their contention that headline inflation was mostly due to the weakness of the pound has been proven correct.

The effect of the “referendum tumble” is fading from inflation data and this week’s fall to 2.7% confirms that, particularly since producer prices which reflect more currently the effect of the level of the currency were negative in February!

With a Brexit transition deal (no matter how one-sided) “in the bag” there is no reason to think the rally won’t continue at least in the short term.

The one cloud on the horizon concerns the rumour of London agreeing to a deal over the Irish border which could inflame the Northern Irish MP’s who support the Government in Parliament.

No details have been mentioned so far other than to say it will be unpopular domestically.

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Fed Hikes but signals three in ‘18 and ‘19

Jay Powell’s debut press conference, as had been considered before his confirmation, displayed a more dovish outlook than had been the case with his predecessor. Powell signalled that that the Fed would hike twice more in 2018 and three times in 2019.

The fact that the Fed wants to “normalize” rates is without question, the only item for discussion was how quickly that will happen. The reduction in the size of the Fed’s balance sheet added to the amount of new Government debt to be issued means that rates are going to have to rise.

Yesterday was a classic “buy the rumour sell the fact” day as traders displayed their fickle nature and were mildly disappointed by the fact that there are only two more hikes slated for this year.

Powell said that the FOMC believed that the tax cuts that have been agreed and the Government’s spending plans (no matter how they will be paid for) will provide a sufficient boost to the economy and spur inflation.

We cannot yet call Powell “Mr. Proactivity” but he has chosen to ignore the current and short-term projections for inflation by giving a positive outlook for the economy.

Dollar sags as Euro and Pound climb.

The dollar index fell back towards its long-term support level yesterday as traders discarded the greenback following the Fed’s rate hike.

The Euro which has been in reactive mood recently, as the ECB reacts with benign neglect to the currency, rose following Tuesdays fall and regained a foothold above 1.2300. While it remains in the broad 1.2520/1.2240, Mario Draghi and his colleagues on the Governing Council won’t have too many sleepless nights.

Sterling has been reacting strongly to the positive data that has been released this week. It reached a high of 1.4151 yesterday and has extended that to 1.4171 overnight. It has also been climbing versus the single currency making a high of 1.1483 as it closes in on the year’s high of 1.1508.

Today’s MPC meeting is unlikely to take the sheen off Sterling’s performance and with the confirmation due tomorrow of the Brexit Transition Agreement by the EU Heads of Government, Sterling should continue to make ground.

As already mentioned, the concerns over the “unmentioned concessions” given to seal the transition deal could see Sterling collapse back below 1.4000 if they are seen to be bringing fresh domestic turmoil for the Government