Inflation Data to provide MPC Guidance

Doves worried about 3% headline

Inflation has been rising in the U.K. following the precipitous fall in the value of the pound in the aftermath of the Brexit referendum. Although the effect of that fall should be waning it has driven the Consumer Price Index close to 3%. The Government target for inflation, which is the main driver for the MPC on policy, is 2%.

Members of the MPC have been diverse in their judgement on both the need for a rate hike and its probable effect on the economy. Two external members have been voting for a hike and with a further external member joining for the next meeting, the fate of her vote will be unclear.

There are currently four BoE officials on the MPC, with one more expected to be announced any time, following the departure of Charlotte Hogg who had been appointed as Deputy Governor but fell foul of regulations on disclosure.

Sterling will react to the data with the upside well protected it is likely to see a fall should a rate hike be taken off the table. That would need a fall to around 2.7% which is certainly possible.

Davis goes in to bat.

The U.K. Government is desperately trying to “big-up” its negotiating position as Brexit talks get underway in earnest. Following last month’s symbolic opening of talks, the significant business is starting this week. The EU wants progress on the bill (“Go Whistle” is the unofficial U.K. position) and the treatment of EU citizens in the U.K.

Mr. Davis is trying act tough but finds himself, like England’s cricketers yesterday, to be on a difficult wicket. For non-cricket followers, this means he basically has no chance of a successful outcome.

The initiative has been firmly handed to M. Barnier following the recent General Election and he must feel that it is time to push home his perceived advantage. It would be difficult for Mr. Davis to use the fate of the EU citizens as a bargaining chip since the clear majority are working and paying into the U. K’s economy in a far from insignificant amount. Furthermore, they are filling jobs that would be very difficult to fill were they to leave in droves.

Sterling fell a little yesterday as the Euro recovered from a technical fall on Friday regaining the 0.8800 level and rising overnight to 0.8825. The long march to 0.9000 has recommenced and while parity is a long way away, forget Brexit, divergent economic activity and an eventual widening of interest rate differentials could easily bring that about!

Dollar suffering as Trump failure to deliver looms.

Whilst it has become a popular pastime over the past six months to blame President Trump for all that ails the U.S., he does cast a giant shadow!

First, he berates the Fed for its slowness in normalizing monetary policy, then he calls for a halt to interest rate hikes as he is concerned about the economy. He promises fiscal reform and to repeal Obamacare but can’t seem to get past Congress.

Meanwhile the economy bumps along the bottom and the FOMC struggles to justify its actions.

The dollar index is now a long way from the 100 level that was last seen in April. It is currently at 94.81 a level not seen since last September. The contrast between the economic performance of the U.S. and the Eurozone couldn’t be more marked despite growth rates that are not so very different from each other.  

Optimism is returning to the Eurozone. It seems there has been something of a collective epiphany where the whole “EU project” has emerged into global consciousness as a dynamic, forceful and most importantly permanent global player.