Decision Day!

MPC to decide on more than rate hike

The Bank of England’s rate setting Monetary Policy Committee meets today in what could turn out to be its most significant meeting since the start of the global financial crisis ten years ago.

Today’s rate decision will provide short term momentum to the pound but how the committee votes and the comments of Governor Mark Carney following the meeting will determine its direction for some time to come. It is difficult to envisage a scenario where Sterling will derive long term strength from the decision without at least a 7-2 vote in favour of a hike. This will mean that only two determined doves have remained concerned about the fate of the economy and the headwinds facing the country. How Governor Carney votes will also be significant as he has been extremely cautious in expressing concerns he clearly has over the effect on the economy of the Brexit negotiations and the final agreement.

The pound made fresh three-month highs versus the single currency yesterday although there is clear selling pressure above 1.1400. There could be an element of “buy the rumour sell the fact” which comes into play today. A hike will probably be a one-off, but whether the market is prepared to accept that the Bank of England could hike again if inflation doesn’t fall will be a major factor for future consideration.

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Brexit factors to return to cloud Sterling’s progress

The recent positivity that has surrounded the interpretation of comments made by both sides in the Brexit negotiations is likely to be tested as the two sides meet again on November 9 and 10.

Expectations will be high that there could be an announcement regarding the commencement of stage two of the negotiations where the future relationship between the U.K. and EU will be discussed. It would be an extremely optimistic view to hope that negotiations could get back on track since the two sides remain so far apart on the basics of the financial agreement. Theresa May’s comment that the EU “should not be concerned” over Britain’s intention to pay what is owed is yet to be backed up with firm proposals and there is still serious disagreement among her Cabinet over what should be offered.

The pound tends to ignore Brexit if it is not making headlines, and this has been the case recently as the markets gaze has been firmly fixed on today’s monetary policy decision. There is no reason to expect that the hard-line being adopted by Messrs Juncker, Tusk and Barnier has softened over the Autumn and David Davis could be set for a disappointment if he sets his sights too high next week.

FOMC lays foundations for path of rates in 2018

Current Fed Chair Janet Yellen provided sufficient advance notice of her colleague’s intentions towards monetary policy going forward in her press conference yesterday to convince the market that the FOMC is likely to hike rates in December and two or three time’s 2018.

She is prepared to discount September’s headline employment report as “out of line” as the loss of 33k jobs was wholly attributable to the hurricanes which battered the south west during the month. Yellen highlighted a strengthening labour market and solid economic performance, so expectation for an upside surprise in tomorrow’s data is high. The market is already expecting more than 300k new jobs to have been created in October which will justify action at the Fed meeting in mid-December.

The dollar index has performed strongly this week but is still unable to sustain a break above 95.00. The euro and pound which make up close to 70% of the index have been recovering ground. The single currency has recovered from the fall initiated by last week’s dovish ECB comments while the pound awaits today’s rate decision amid positivity towards Brexit. The widening of interest rate differentials will provide long term support to the greenback as the Fed cements its place as far and away the most hawkish G7 Central Bank.