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Sterling in focus ahead of Haldane and Broadbent speeches

European markets saw positive momentum from the better-than-expected US jobs report at the end of last week carry over into another positive session yesterday, as a strong performance in German trade for May showed decent increases in both imports and export data, after a lacklustre April performance.

This optimism helped pull European stocks further away from their recent lows, while a rebound in crude oil prices also helped as speculation rose that OPEC might look at including Libyan and Nigerian production back into the OPEC cap, to help try and help rebalance the market. While this would no doubt help in the context of meeting the production caps, it is hard to see how Libya in particular would agree given its current problems and fragmented governance.

Bond yields also paused a little, pulling back from their recent highs after Chinese inflation data showed no signs of any evidence of a pickup in pricing pressure. This is a far cry from the beginning of this year when talk of the reflation trade and rising prices was all the rage. This is still where the primary focus remains at a time when central bankers appear to be changing tone on the current status quo of monetary policy.

Recent comments from ECB president Mario Draghi, splits on the Bank of England monetary policy committee and senior Federal Reserve officials public utterances to start paring down the US central bank's $4trn balance sheet as soon as September speak to a desire to start edging rates higher, to build themselves a buffer against the next downturn.

With Fed chief Mrs Yellen due to speak to US lawmakers tomorrow, there will be significantly greater scrutiny around her remarks given the tone of last weeks Fed minutes and Friday’s better-than-expected US payrolls numbers.

We could hear more details from Bank of England chief economist Andrew Haldane, on what could prompt him to reverse last year's rate cut when he is due to speak later today on a panel discussion in London. Mr Haldane caused some consternation a couple of weeks ago when he stated that he came close to considering voting for a rise in interest rates at last month’s Bank of England rate meeting. This has put an altogether different slant on last month’s vote when it comes to potential splits on the committee, while also putting him at odds with his boss, Bank of England governor Mark Carney, whose views on interest rate policy seem to change as often as the weather forecast, and are about as reliable.

It would appear that Mr Haldane, who called for a sledgehammer in August last year, appears to have realised that last year’s stimulus may well need to be reined back a touch and that the only thing that gave him pause last week was the currently weak nature of wages growth, which could make tomorrow’s wages numbers all the more important in the context of where sterling might head next.

Deputy governor Ben Broadbent may also have something to add to the policy debate when he speaks later today, particularly since he has expressed concerns about the effects of a weaker pound on the inflation outlook, though with markets pricing an almost 50% probability of a UK rate rise by the end of this year, the risk of a dovish outcome seems high.

Forex snapshot

EUR/USD – having broken above the 1.1300 area, this is now acting as support for a move back to the 2016 highs at 1.1617, though the 1.1450 area is acting as a bit of a barrier for the moment. A move below 1.1280 could well reopen a move back to the 1.1100 June lows.

GBP/USD – the failure last week at the 1.3040 level increases the prospect of a move back to the 1.2750 area, with support also at the 1.2820 area.

EUR/GBP – the 0.8865/70 area remain a key resistance and the main obstacle to a move up to 0.8920. While we remain below this key level we could well head back towards the 0.8720 level.

USD/JPY – looks to be heading back towards the May peaks at 114.40, while behind that we also have resistance up around the 115.20 level and March highs. Looking overbought so could struggle here with a drift back to the 112.40 level a possibility.

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