Last night’s Federal Reserve meeting passed uneventfully as the central bank left rates unchanged, while remaining on course to hike rates in December. The market was much more interested in who President Trump intended to appoint as the new Fed chair and it turns out, if reports are correct, that it will be Jerome Powell.
A number of other names had been touted from Gary Cohn, John Taylor, and Kevin Warsh. It now looks as if Jerome Powell has got the nod, which was always likely to be the sensible option.
Not only is he the continuity candidate given he is already on the Fed board, but he also has a good working relationship with the current FOMC. The other three would be somewhat of an unknown quantity in terms of their relationships with other members of the Fed, as well as their outlook on policy. That doesn’t of course mean we won’t see their names in the frame for the other roles up for grabs on the board.
At lunch time today the Bank of England will have either raised rates for the first time since 2007, or they will have presided over the latest episode of shambolic forward guidance since Mark Carney became Governor of the Bank of England back in 2012.
They do have previous when it comes to misleading the markets when it comes to rates, but despite the misgivings expressed by two of the newest members of the Monetary Policy Committee, David Ramsden and Jon Cunliffe last month it is widely expected that the central bank will reverse the rate cut seen in August 2016 at midday today, albeit the vote is not expected to be unanimous.
While the extent of division on the MPC will be important, will it be 7-2, 6-3 or 5-4 in favour of a rate rise, the key test will be what comes after that, which is likely to be the key test in terms of how the bank sees the UK economy, through the prism of its latest quarterly inflation report.
At its last meeting Mark Carney suggested that he expected inflation to peak in October and we’ll find out whether he has to write to the Chancellor of the Exchequer in two weeks’ time when the latest CPI numbers get released.
If rates rise as expected he will have to navigate a delicate balancing act of having to justify why he is raising rates while at the same time warning that the growth trajectory of the UK economy is likely to be lower than originally estimated.
Yesterday the NIESR downgraded its outlook for the UK economy for this year and next year while saying that the Brexit vote has cost each household more than £600 a year due to the decline in the pound, which had helped push up inflation.
This is somewhat disingenuous given that part of the sterling decline was also precipitated by the panicked reaction of the Bank of England in slashing rates in the aftermath of the vote, which means part of the £600 is down to the Bank of England’s actions.
As things stand the reaction of the economy since then has been fairly solid, despite rising inflation, and as such it is only right that some of the emergency measures implemented last year should now be reined back. Unemployment is at a 42 year low and average earnings at the lower end of the pay scale have risen more than inflation due to increases in the minimum/living wage, while in the middle they are rising at around 2.1% on a quarterly basis.
Yesterday’s October manufacturing PMI also came in at the best levels since April this year at 56.3, though today’s construction PMI could well disappoint at 48.3.
It’s also important to remember that when the Bank of England acted last year they were predicting that growth this year would be a measly 0.8%, while also implying that further measures would be needed later in the year.
They were also being cheered to the rafters by the very same economists who are now imploring them not to hike today.
On pretty much every conceivable measure they have been way off begging the question as to why we should take any notice of them now.
The bank will also be cognisant that the US Federal Reserve is likely to raise interest rates next month to 1.25%-1.5%, while the European Central Bank is also on course to reduce the amount of stimulus it is pushing into the European economy, early next year.
With interest rates already at record lows a reversal of last year’s rate cut won’t be the end of the world and it would be a major surprise if the bank suddenly got cold feet, potentially shredding any remaining vestige of credibility it has.
In ordinary circumstances the fact that markets are assigning a 90% probability of a move on rates today would mean that the markets think a move is a done deal. The fact that we are still debating whether or not the bank will move today, and whether the vote will be unanimous shows how unsure the markets have become about the Bank of England’s communication strategy.
EURUSD – has so far tried and failed and four occasions to get back above the 1.1670 head and shoulders neckline this week. While below 1.1680 the risk remains for a move back to 1.1570, and on the way to a move towards 1.1390, and then on to 1.1230.
GBPUSD – ran out of steam at the 1.3320 area and could slip back below the 1.3220 area towards 1.3120 if the Bank of England is particularly dovish. A move through 1.3340 is need to target the 1.3420 area.
EURGBP – slipped briefly below the 200 day MA yesterday rebounding from 0.8733, and we could squeeze back towards the 0.8825 area. We need to recover back above the 0.8870 level to argue for a return to the 0.8920 area.
USDJPY we need a move through the 114.40 level to argue for further gains towards the 115.60 area. Support comes in at the 113.20 area and last week’s low, with a break retargeting the 112.40 area.
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