MPC Unlikely to alter Pound’s course

Rate hike off the table as Sterling searches for support

This week’s meeting of the Bank of England’s Monetary Policy Committee was seen, until a few weeks ago, as being certain to hike interest rates as the rate of inflation remained a concern despite having seemingly topped out.

The change in sentiment originally precipitated by Governor Mark Carney’s cautionary comments has been spectacular as a series of issues across the full spectrum of currency drivers have conspired to send the pound appreciably lower. It reached a low of 1.3486 yesterday versus the dollar and 1.1308 versus the euro, although it has rallied strongly against a weaker single currency overnight, reaching 1.1391.

Weak economic data, Brexit concerns and the withdrawal of the support of a pending rate hike have combined to push the pound below its level at the start of 2018. Such a rapid fall will raise concerns over its inflationary effect and it is doubtful that when inflation data is released next week the fall will be as sharp as was seen in the previous month.

The Prime Minister continues to try to placate the Northern Irish support for her Government by cobbling together a diluted customs union plan following Brexit, but her plans were criticized by her Foreign secretary overnight who called them “crazy”.

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Risk appetite to be hit by Trump’s Iran decision

The leaders of Iran have already commented that should the U.S. pull out of the nuclear agreement that was agreed by President Trump’s predecessor, there will be “consequences”. Just what they will be may be a little clearer later today as Trump announces his decision at around 6.pm UK time this evening.

There is little doubt that the reduction in global risk aversion has been one of the major factors in the dollar’s recent rally. With trade talks in China seemingly stalling and now the Iran issue flaring up, the index may find it tough, in the short term, to break resistance at 93.08. It made a high of 92.98 yesterday and has lingered close to that level overnight.

It is a testament to market sentiment towards the dollar that Friday’s weaker than expected employment report has barely changed the markets perception, but the dollar may now simply be considered the best of a bad bunch of G7 currencies.

The employment report highlighted its tenuous nature with the March data being revised by more than 30%! The U.S. economy added 164k new jobs in April lower than the markets mean expectation of 192k but since the data is little more than an estimate itself it is hard to predict accurately.

Wage inflation was a little weaker than had been expected falling back to 2.6% following March’s 2.7%. This will have dampened expectations of a June hike from the FOMC since even if May’s data is stronger, Chairman Powell is unlikely to sanction a hike based on one month’s data.

Eurozone data provides reason for currency weakness

The euro has been weakening recently, having fallen by a little over 5.25% since it made a year’s high in mid-February. While the fall has hardly been precipitous, it has been due, primarily, to the studious neglect of the European Central Bank who show little concern for the inflationary effect of a weaker currency.

Over the past couple of weeks, we have seen economic data, particularly from the supposedly stronger economies of the region, turn lower culminating in weaker German industrial activity and a fall in overall Eurozone investor sentiment.

The single currency made a low of 1.1897 yesterday, perilously close to what many traders see as a “line in the sand” at 1.1880 below which the pace of the fall could increase and herald a period of sustained weakness.

The euro has been in reactive mode versus the dollar but has “kept pace” with the fall in Sterling which is significant in terms of the overall market view of the economy. While growth data has been acceptable, and inflation is clearly not an issue, the debt overhang, immigration and the “Macron plan” for greater integration could bring serious concerns for the continued stability of the currency.