Interest Rate Hopes Drive GBP and EUR

G10 interest rate outlook turns hawkish

It is almost as if the G10 has agreed that the financial crisis can be consigned to history and the outlook for the global economy has suddenly turned brighter.

Tightening of monetary policy, which has already started in the U.S., has been warned of this week by the Eurozone and U.K. Yesterday, Canada gave warning of the need for a rate hike and there is speculation that, although it may not hike at its policy meeting next week, the Reserve Bank of Australia will also turn more hawkish.

The Euro has risen by 2.2% against the dollar this week to its highest level since May 2016 and is set to have its largest quarterly gain since 2010.

Mario Draghi, the ECB President, has been at pains to say very clearly that an interest rate hike in the Eurozone is some way away given a benign inflation outlook and the fragility of growth in parts of the region. Traders have been happy, however, to concentrate on the fact that the roll back of the stimulus measures, put in place to promote growth, is probably going to start in Q3.

The common currency broke through 1.1400 against the dollar and looks set to test 1.1500.

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May manages to hang on

In the end, it has been a slightly more comfortable week for British Prime Minister Theresa May than had been feared. The ruling Conservative Party won a vote on an amendment to the Queen’s Speech on Wednesday, then the vote on the Queen’s Speech was carried by a, relatively, comfortable fourteen votes.

The first battle has been won but the war will continue. May will face problems both internally and externally. The deal with the Northern Irish Members of Parliament should enable the Government to carry on for the foreseeable future but internally it is possible that she will be seen as mortally wounded and a leadership contest could easily be called.

Brexit is the total focus of Parliamentary business over the next two years. Several measures both to smooth the departure and ensure that it is “business as usual” afterwards will be put before MP’s.

Sterling has followed the Euro higher. The double-edged sword of tighter monetary policy in the U.K. and a possible pause to U.S. rate hikes has led the pound to test 1.3000.

Carneys hawkish view backed by Haldane

Speculation that BoE Governor Mark Carney had been persuaded over the need for tighter monetary policy by his Chief Economist Andrew Haldane received further evidence yesterday.

Haldane, himself a member of the MPC spoke last week of the need for the Bank of England to hike rates and that he was considering joining those voting for a hike at the next meeting. Carney’s change of emphasis is believed to be in part driven by conversations with Haldane where the risks facing the U.K. from almost uncontrolled inflation were discussed.

Sterling has thrown off the shackles of political and economic concern to push through the 1.3000 level against the dollar. The rise in sterling throughout Q2 should be a positive force in the lowering of inflation.

Sterling has risen against the dollar by a little over 5% since the beginning of April. Over the same period, the pound has weakened against the Euro, and there is still a fear that over time parity could be reached, but over the past week when the Euro has surged, the pound has managed to keep up with the pace.