Dovish BoE to set tone for Sterling

Markets in holding pattern

There are several factors bubbling below the surface that could provide further impetus for the markets but for now, we are seeing narrow ranges. One of those factors is this week’s Bank of England Monetary Policy Committee meeting.

There has been a certain degree of expectation surrounding recent meetings this week. Comments have been muted as it is certain that there will be no change to short term rates and just as likely that Mark Carney’s press conference will have a dovish tone.

While Brexit remains the most prominent driver for the currency, the economy and monetary policy are also significant, although they are both reactive to Brexit longer term.

A confrontation is brewing over a major procedural matter in Parliament as the upper house insists that if there is no deal, Parliament should be allowed to debate and vote upon the next steps while the Government insists that Parliament should be simply informed what the Government intends to do.

Meanwhile, the EU summit is due to be held next week and firm proposals for the future relationship have not as yet seen the light of day.

The pound traded in a narrow band yesterday versus the dollar although it lost ground versus the single currency. Against the greenback it traded 1.3283/1.3226, closing at 1.3244 while versus the euro, it reached a low of 1.1392 before closing at 1.1397.

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Euro firms despite headwinds

The single currency rose a little within a narrow range in reaction to a slightly weaker dollar as the Eurozone faces issues of its own.

The is likely to be further volatility today as both ECB Chief Economist Peter Praet and President Mario Draghi speak at the three-day ECB symposium being held in Portugal.

Neither will speak on monetary policy, but both will be questioned about the ECB’s plans despite the clarity provided by last week’s press conference.

The job of the ECB in moulding monetary policy for nineteen very different economies has proven to be an onerous task over the past nineteen years during which time there has been significant turmoil. Mario Draghi has adopted a “hands off” approach which has worked thus far, but his legacy could be determined by what looks to be his final challenge: how to deal with the bad debts that banks still have on their balance sheets which have, to a large extent, been ignored.

While the majority of the issue lies within German and French banks, whose economies can cope with the issue, there are several weaker countries that still have very high non-performing loans as a percentage of total loans. In Greece, it is as high as 45%, with Cyprus not far behind. Across the entire Eurozone, 8% of total loans are non-performing.

Germany is facing a political row as Angela Merkel’s coalition partners are planning to implement a plan limiting immigration at German borders in defiance of Merkel’s virtual open-door policy. A serious rift is unlikely, but immigration is a cornerstone of the Government’s policy, and as such, a sensitive issue.

The euro remains close to its 2018 low, rising to 1.1625 yesterday and closing close to its high. It has remained in positive territory overnight.

Dollar struggles as Trump threatens more tariffs

The tit-for-tat trade war that is developing between the U.S. and China shows no sign of abating as the U.S. implemented tariffs that were agreed on sixty days ago, and China retaliated with tariffs of its own.

Yesterday, the White House threatened a 10% tariff on a further two hundred billion dollars worth of Chinese goods with Beijing countering that any response would be “qualitative and quantitative”.

The rising tensions between the world’s two largest economies has hit the dollar, slowing its recent rise as global risk appetite is hit. The dollar fell against the JPY and CHF. These are the usual beneficiaries in times of global tension as their current account surpluses deem them to be “safe havens”.

While the U.S. economy is growing close to trend and employment continues to improve despite inflation continuing below the Government’s target, it is foreign policy that is still the primary driver for the currency, despite last week’s rate hike and hawkish press conference.

The dollar index fell to 94.70 yesterday and closed just five pips from the low. The 95.20 level is proving to be significant resistance and it could take a combination of bad news for the euro combined with a further foreign policy win for that level to be conclusively broken.