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Carney set to give guidance on guidance
00:00, 12 February 2014
There was nothing surprising in any of yesterday’s comments from Janet Yellen with her “steady as she goes” measured approach with US lawmakers, according to some commentators, apparently responsible for yesterday’s strong rally in US markets. This seems unlikely simply because she didn’t say anything different from that of her predecessor Ben Bernanke, and nor was she likely to. It is much more likely that one of the main reasons US markets rallied as strongly as they did yesterday was because Republicans finally drew a line under one of the more festering political sores of the past few months, when House leader John Boehner announced that Congress would be voting for a “clean” debt limit hike midway through the US trading session. The vote subsequently went through by 221 votes to 201 and will subsequently be revisited again a year from now, but the subsequent gains look set to see Europe start the day slightly higher, also helped by some rather surprisingly positive Chinese trade data, with exports and imports both jumping 10% in January, well outside, and better than market expectations. Some scepticism has been expressed surrounding the numbers given the recent weakness in PMI’s as well as Chinese New Year which historically sees trade flows slow down. It would appear that Federal Reserve chair Janet Yellen and Bank of England governor Mark Carney have a lot in common with unemployment rates within 0.1% of their guidance thresholds. While the Federal Reserve has the benefit of a dual mandate the Bank of England does not, despite the fact that Mark Carney felt the need to adopt one in August last year, when he announced that the Bank of England would not even consider raising interest rates, until or unless, a number of key criteria were met. It was felt at the time that this forward guidance might come back and bite them, something MPC member Martin Weale warned about at the time, though he was more concerned about the inflation part, not the unemployment part, and even though he decided to get on board, it appears that he was right to be concerned, even if it was for the wrong reasons. Today’s quarterly inflation report from the Bank of England could well see tweaks to this policy, when Governor Carney outlines the banks outlook for the UK economy. That being said, while it is true that unemployment has fallen much faster than policymakers initially thought, it still remains that inflation is on a downward path for the moment, and for that reason alone it remains unlikely that the Bank of England would be raising rates any time soon, even if the unemployment rate fell to 7% in this month’s figures, which remains highly unlikely, unless we get a sudden fall in the one month number in December to 6.6%. The key question today will be whether or not Mr Carney either quietly drops the unemployment threshold, revises it, or pushes the market in the direction of average wage growth relative to price inflation, or whether he toughs it out by insisting that the unemployment rate was one indicator, and only a threshold, along with the inflation rate, and that because both are falling the need for a rate hike remains some way away. It seems highly unlikely that he would tweak the guidance lower to 6.5% because he would run the risk of the Bank losing credibility, at a time when its credibility is already stretched due to its inability to hit its inflation target over the last five years. EURUSD – the euro continues to edge higher towards the January highs just above the 1.3700 area, but we also have a bit of a top at 1.3650. Above 1.3700 we still have long term trend line resistance at 1.3850 from the all-time highs at 1.6040 and ultimately this remains the key obstacle to a move through 1.4000. We still have fairly strong support at the 1.3475/80 area which is currently supporting the euro. The onus remains towards the downside while last month’s bearish engulfing candle on the monthly charts remains valid. GBPUSD – yesterday’s break above the 50 day MA at 1.6420/30 could well trigger a move towards the 1.6510 area. A break above the 1.6510/20 area could well see a return to the highs seen last month at 1.6660. Support remains at the 1.6250 area and 100 day MA which remains the last obstacle to a drop on the 1.6000 area. EURGBP – last week’s move through 0.8330 level has so far find it difficult to push on towards the 0.8375 level and trend line resistance from last August highs. On the downside we have support at 0.8260, and below that at our previous lows at the 0.8165 level. USDJPY – last week’s rebound back above the 101.80 level shifts the focus back towards the 103.00 area. The 101.80 level should now act as support for this move to unfold. A move back below 101.80 retargets the recent lows at 100.80, and even potentially a move towards the 100.00 level and 200 day MA. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.