Sterling strength after a relatively hawish Carney press conference

Fundamental View

Caution reigned throughout the markets yesterday as investors eagerly awaited developments from the extraordinary meeting of the 19 Eurozone finance ministers. Equities and the major currency pairs stayed in a tight range through to the US cash open, before lifting slightly on hopes of a deal with the Greeks and their partners in the monetary union. Rumours swept the markets going into the meeting at 15:30 that an agreement would not be reached before the weekend as the more sceptical Eurozone members wanted more time to assess the Greek proposal. Ultimately though, and for anyone who has followed the European response to past crisis situations, the meeting ended in predictable confusion, with initial reports that a deal had been reached proving wide of the mark as a post-meeting joint statement from all the member states was pulled at the request of Greece. The newly-elected Greek government appears unwilling to budge on their campaign promise to end the extend-and-pretend bailouts, whereas their Eurozone partners do not want to offer a ‘bridge’ loan and remain uncomfortable with the terms of Greek finance minister Varoufakis’ debt swap. Therefore, stalemate remains while the 28th February deadline looms large.

Today’s View

Today we saw comments from BoE’s Carney speaking during the Bank’s quarterly inflation report. The BoE sees inflation remaining lower in the short term but a return to the 2% target in the medium term; Carney attributed the majority of the fall in near term inflation to the falling prices of energy. Low wage-growth has affected the Core readings but the Bank has seen a pick-up in domestic pressures, commenting that they are likely to build over the forecast period. The bank sees inflation returning to 2% within two years, assuming that the Bank rate rises gradually, a pace which is in-line with current market expectations. We have thus seen sterling strength after what was a relatively hawkish press conference, maintaining an upbeat outlook on the disinflationary situation and satisfying market participants. There was a mixed reaction initially as traders contrasted the 9-0 dovish vote from last month with the hawkish tone of this quarterly report. In the wake of the ceasefire agreement being reached we have seen Global bourses rise in a risk-off move, confirmed by the drop in Bund prices and an influx into stocks. The dollar is also seemingly on the back foot, assisted by the strengthening of the pound against all other currencies. Ahead we have Retail sales for the month of January expected at -0.4%; this comes alongside the weekly jobless numbers and continuing claims figures. As this is the first real data-filled day of the week, expect slightly larger volatility than is usual due to traders wishing to capitalise on moves that have been denied throughout this quiet phase. We are bullish on the dollar providing retail sales post in-line/better than expected.