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Bank of England in focus, one year on from Haldane’s “sledgehammer”

The US dollar continued its downward decline against the euro yesterday, touching a new 30 month low, helped further on its way by comments from FOMC non-voting member St. Louis Fed Chief James Bullard, who said he was opposed to further US rate rises on the basis that they could hinder the central bank’s ability to hit its 2% inflation target.

While by itself his comments may not seem that important, given his non-voting status they do speak to a wider belief that the Fed is done for this year in terms of rate rises, and the belief that he is unlikely to be alone on the committee in adopting this particular position. With data in Europe continuing to remain buoyant, bets are increasing that the ECB will find itself in a position where it will have to rein back the levels of stimulus it is pushing into the monetary system in Europe.

This decline in the US dollar, while not doing US stocks any harm as the Dow once again made a record high and close above 22,000, continues to act as a headwind for European stocks with the DAX in particular feeling the heat, having given up all of its post Macron gains, along with the CAC40.

It’s been twelve months since the Bank of England went all “shock and awe” or wielded the monetary “sledgehammer”, the central bank’s chief economist Andrew Haldane’s metaphor, not mine, and since then the performance of the UK economy has outperformed expectations.

Some would argue that it’s because of what the Bank of England did, while some would argue it would probably have happened anyway. One thing is certain is that as a result of last year’s action UK consumer credit has shot up to levels last seen in 2008 of £200bn, while inflation has been higher than it needed to be.

Just before the Bank surprised the markets last year the pound was trading at 1.3300 against the US dollar and in the subsequent weeks following the decision it fell as low as 1.1950, an additional 9%, before rebounding. Even now it hasn’t completely reversed those losses, which means that the Bank of England contributed to an additional income squeeze on those parts of society who could afford it the least.

As we look ahead to today’s meeting the consensus surrounding last year’s measures still isn’t total, with three members of the MPC voting to reverse last year’s move at the last meeting in June, while chief economist Andrew Haldane announced he was considering a reverse ferret, but held back due to concerns about weak wage growth. 

It is also important to note that last year’s decision wasn’t totally unanimous with three policymakers pushing back against the additional QE.

As for today the picture looks a little different economically with the UK economy starting to show signs of slowing slightly, though manufacturing does appear to be starting to pick up speed again. Yesterday’s construction numbers were disappointing, while we’ve also seen some softening in the services data in recent months. Today’s services PMI for July is expected to show a slight improvement to 53.6 from 53.4 in June.

There also appears to be some evidence that wages might well be starting to pick up, while the higher pound could start to take the edge of higher prices in the coming months, which rather invites the question as to whether we need interest rates at emergency levels. Moving them back to their pre-referendum levels needn’t invite speculation about the prospect of further hikes if communicated properly, though we know that the Bank sometimes struggles with that.

In this context how the Bank of England manages expectations with respect to its growth forecasts could be important, will it adjust them down from 1.9% in line with the IMF’s 1.7% and more importantly will it change its inflation forecasts from the current 2.7%.

Before that we also have the latest services PMI’s from Spain, Italy, France and Germany which are all expected to show modest improvements to 58.4, 54.2, 55.9 and 53.5 respectively, further increasing the pressure at the European Central Bank to look at paring back its monthly stimulus package, and potentially putting further upwards pressure on the euro.

EURUSD – continues to push towards the 1.2000 level and away from the 200 week MA at 1.1795, trading briefly above 1.1900. A close above 1.1800 could well presage bigger gains towards 1.2500 and the December 2014 peaks in the coming weeks. Support remains back at the 1.1610 level, and below that at the 1.1480 area.

GBPUSD – the pound continues to push higher towards the 1.3310 level building a foothold above 1.3200 and another 10 month high. Still has support just above the 1.3000 level, with minor support also at 1.3140. Only a drop below 1.3000 opens up a retest of the 1.2900 level.

EURGBP – while below the 0.9000 area a pullback to the 0.8870 area remains a possibility. A break above the 0.9000 level retargets the 0.9300 area, and 2016 highs. A break below 0.8870 would delay this and open up a move back to the 0.8780 area.

USDJPY – has managed to rebound from support at the 109.80 area, and could well run up to the 111.30 area in the short term. A move above the 111.30 area retargets the 112.30 level.

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