'BoE trying to avoid cuing aggressive speculation over first rate hike timing' - John Kicklighter, DailyFX

   John
Kicklighter

PROFILE:
• Current Job:  Senior Currency Strategist for FXCM in New York.
• Career: Graduated from the Zicklin School of Business with a Bachelors degree in Finance and Investment. Specialized in combining fundamental and technical analysis with money management.

View profile at FXStreet

John Kicklighter is the senior currency strategist for FXCM in New York where he specializes in combining fundamental and technical analysis with money management. John authors a number of regular articles for DailyFX.com, ranging in topics from basic fundamental forecasts for the G10 economies and commodities to more complex subjects like the level of risk sentiment across the financial markets and the carry trade specifically.

John has actively traded since he was a teenager. His experience ranges from spot currency, financial futures, commodities, stocks, and options on all of these instruments for his personal accounts. John graduated from the Zicklin School of Business at Baruch College in New York with a Bachelors degree in Finance and Investment.

Do you expect Janet Yellen to hint at any shifts in Fed monetary policy at Jackson Hole this Friday? What tone could she strike in your opinion?

The Fed Chair has made a concerted effort to maintain a dovish leaning status quo through both the FOMC policy meetings and her own press conference outings. From her perspective, inspiring confidence in the markets is critical. The central bank is trying to keep interest rates down to support growth, acclimatize the market to a future where normalization will have to take place and attempt to curb a financial bubble. The rate focus has been consistent and the preparation of a withdrawal of stimulus has grown consistent over the past six months. The financial bubble concern has only recently found its way into the commentary. And yet, it can pose a serious problem to the entire effort. I would not be surprised to see the most substantial new ground broken on this topic.

Is Mark Carney irreparably damaging BoE's credibility with his contradictory statements on monetary policy? Is the MPC really clueless about how to proceed?

Governor Carney and the BoE adopted the game plan that the Fed had used back in June 2013 when it introduced hard targets. This was not meant to act as clear line on ‘when’ they will act, rather it was likely adopted as a measure to reassure – thinking that the targets were liberal enough that they would not be met in the time frame that they were. Of course this didn’t play out as the Fed and BoE expected. Where the BoE furthered the confusion however was its offhand commentary. On one hand suggesting they will keep with a dovish course and on the other noting surprise that the market was not fully accounting for the chance of a hike. This is likely a poor application of jawboning. They may be trying to curb the heat on the Pound and capital markets while simultaneously maintaining confidence to keep investment in the economy building. The BoE will very likely take on a slow pace of rate hikes when it starts, but it is also trying to avoid cuing aggressive speculation over the first move. Investors will not conform so readily.

Are the West's sanctions against Russia really hitting the spot? When could their impact start becoming more evident?

The sanctions the US and Europe have placed on Russia over the Ukraine standoff are certainly having an effect. Economic data to this point has not shown an extreme impact, but the pinch is slowly working its way through – and the pressure will have a cumulative effect. Much of what we have seen to this point is measured in trade and inflation measures for certain product segments (such as food). Given the growing imbalance of advanced and developing market alike, this additional economic constraint poses a serious risk to the Russian economy moving forward. Then again, given the interconnections across the global economy, trouble for one of the Emerging Market’s biggest members poses a distinct risk for the west as well.

Given the economic and monetary policy divergence between the Eurozone and the US, do you see the EUR/USD near 1.3000 before year-end?

The split in monetary policy and economic health between the US and Eurozone economies has already generated a 750 pip retreat from EUR/USD, and the medium-term course for these factors suggests we will continue down this path. While the US is certainly showing a slowing clip of expansion, the Eurozone’s situation looks to hit the brakes harder and for longer. The complexity of the EZ’s aggregate economy and connections create a feedback loop where the slowing in the ‘core’ economies (which we are currently seeing) can in turn halt the peripheries recovery before it has reached a self-sustaining stride. The real risk going forward is what happens to the capital markets and the complacency that sustain them. If there is a move to unwind risky positions and work down leverage, the capital inflows that have leveraged the Euro-area sovereign debt and market benchmarks higher will retreat aggressively. And, the repatriation will add to a likely safe haven flow back into the US – amongst other regions.

Will the end of Fed QE (likely in October) have any immediate impact on the dollar?

Though it is consensus, the end of QE3 at the October meeting (purchases will likely continue through the month) will still likely be met with financial market readjustment. Aside from the shift in focus from unorthodox monetary policy measures to the timing of rate hikes amongst speculators, there will be changes from some market participants to account for the change. Larger and ‘slower’ moving asset managers and funds that have mandates not to rebalance or reposition until changes are realized will have the impetus to change their exposures. This impact is unlikely to be dramatic, but it can play out over some time. Beyond this effort, speculation on rate hikes will be the biggest driver – a theme that will play out for months forward.

The GBP/USD has fallen for seven consecutive weeks now as UK data and BoE dovish shift smashed prospects of a 2014 hike. Do you think the GBP is likely to retrace completely this year’s gains?

Having already dropped over 600 points from its peak this year, GBP/USD less than 50 pips from fully wiping out the gains it made through 2014. That is relatively easy to finish off. Further declines from there, however, are likely. The retreat in aggressive interest rate expectations for the Bank of England has exercised a lot of its excess premium in this two month move. There is certainly further room for it to retreat. However, for the pair to keep the kind of pace it has developed, we will likely have to see the dollar pick up its end of this effort. Interest rate forecasts for the Fed are still exceptionally weak. Compared to the projections from the Fed and economists, the market is significantly discounting the return to a tightening regime. This is perhaps partially owing to doubt over growth and rates, but it is more distinctly a side effect of ‘complacency’ in investor sentiment. Should risk trends shudder, the market’s discount on Fed projections will retreat and we will see the subsequent dollar climb drive GBP/USD further lower.