BoE plans to help should inflation start to rise

The pound rallied to a high of 1.3395 yesterday and has continued to climb overnight as traders sell the dollar in response to Fed Chairman Jerome Powell’s speech at last week’s Jackson Hole Symposium (see below).

The comments from BoE Governor Andrew Bailey have been interpreted entirely differently although in effect both Central Bank Heads have confirmed that rates will stay lower for longer.

It is the fact that the Fed will simply ignore rising inflation which means it could find itself behind the curve should prices start to rise quickly that has spooked the market Bailey’s confirmation that the BoE has both the tools and the firepower to tighten policy if necessary without hiking rates is believed by traders to provide a more stable platform.

Rumours continue to swirl about the methods that Chancellor Rishi Sunak will use to raise funds to repay the debt the Government has incurred during the Pandemic. It seems likely now that taxes will be raised by that is still a huge grey area.

While Sunak will definitely disappoint a large section of the public the fact that Prime Minister Boris Johnson appears to be sticking to his pledge that austerity is dead should provide a degree of comfort.

Data for manufacturing output will be released this morning and while this will give some idea of how the economy is reacting to the lifting of lockdown, given that the economy is 80% driven by services, it is the data for that sector of the economy that will be released on Thursday that will have more impact.

The pound’s rise continues to defy gravity. It has taken six months to recover the losses of ten days that occurred at the start of lockdown. It is now trading at its highest level versus the dollar since last December. Resistance is at 1.3515, the high from last December, which if broken could see the pound target 1.43 area if it can maintain its present momentum.

That is a big if!

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Traders see little reason to buy the greenback

The dollar’s fall, having paused a little during the August lull, looks likely to gain momentum having had the ground pulled from underneath it by the Fed’s new inflation targeting policy.

In more certain times, traders would have been beginning to think about the effect of a weakening dollar on the economy as it would have led to rising inflation having fallen by 9% this year. However, with the Fed now targeting an average inflation rate it has ample room to rise before the Central Bank acts.

That may be how the Fed views price rises but the dollar’s buying power will be diminished. No matter the pace of the recovery, traders see rates in the U.S. staying lower for longer than in other G10 economies.

Data releases this week are unlikely to provide support. Today sees the release of data for manufacturing output and while this is likely to continue to show expansion, it is unlikely to have improved from last month’s read of 53.6.

The U.S. economy is acting in a similar manner to both the UK and Eurozone in that pent-up demand led to significant increases across the board once lockdown started to be lifted but is levelling out as the uncertainty remains.

The latest market expectation of Friday’s NFP data is that 1.4 million new jobs were added in August. This is lower than the 1.76 mio for July and if the rate continues to slow, unemployment will be close to 10% come the election.

Biden and Trump continue to snipe at each other over law and order. While neither has the answer to the current unrest, Biden is stronger on domestic issues than Trump who would prefer to concentrate on Foreign Policy where he is stronger if not necessarily more successful.

The dollar index fell to a low of 91.99 yesterday and closed at 92.17. The close below 92.20 triggered more selling and it has so far fallen to 91.77 in Asian trading (05.30BST).

ECB sees current PEPP level as appropriate

ECB officials continue to try to justify inaction as a policy decision.

While time and tide wait for no man, the sanctity of the August vacation period, even if it means a staycation this year, must be honoured.

Isabel Schnabel, a Member of the Bank’s Executive Board commented yesterday that it is not worried about the FX rate, believing that FX will take care of itself.

Of course, from German perspective any natural phenomenon which aids the control of inflation is to be welcomed. ECB officials trying to convince traders that doing nothing is the way to go is nothing new and is being turned into both a policy tool and an artform.

Schnabel is an academic so her input will be devoid of any form of urgency. She confirmed yesterday that the economy is performing in accordance with the ECB’s baseline forecasts.

It seems that once the forecast is made, the Bank’s Board has such faith in its team of economists that no matter how bad it is, little can be done to improve things.

The biggest accommodation she was able to give to the rise in Covid cases was that plans to meet in person on September 10th may now need to be revised.

Following Mario Draghi’s comments last week, analysts have been considering the longer lasting effect of the Pandemic on the entire economy.

While the 2008 debt crisis was a national issue, the pandemic will be seen more at the domestic level hitting both businesses and employment. Insolvencies are set to rise exponentially and there is a fear that free movement could lead to instability as jobless migration grows.

While the ECB shows its lack of concern over the euro, it continues to rise versus a weakening dollar. It is likely to break the 1.20 level today, but how much further it can go is more a matter for the Fed than the ECB.

Yesterday, it reached a high of 1.1966, closing at 1.1936. Overnight it has for far touched 1.1997.