Interest rate hike from the UK in 2014 increasingly unlikely

In a relatively uneventful day for the UK we saw the all too familiar scenario whereby the BoE once again remained passive and kept the Interest rate on hold at 0.5% along with quantitative easing at £375Bn. Last Month the BoE governor Mark Carney eluded to a potential rate increase later this year as long as the economic recovery became more secure and showed signs of sustainable growth. The UK economy grew 0.8% in Q1 this year, the fifth straight quarter of growth, which is leading to greater confidence in the economy and less reason to keep the rate at the historic low.
Unemployment is also falling – another key proviso to an interest rate rise. The problem is that there is no current need to raise interest rates to keep consumer prices in check, indeed the inflation rate fell to 1.5% in May from 1.8% in April and well below the BoE target of 2%. We could well see a consequence whereby the optimistic ‘will they won’t they’ interest rate situation will eventually turn to uncertainty which will itself in turn start weighing on the Pound. To sustain business confidence the MPC should strive to deliver a more clear and consistent message with regards to the future path of interest rate policy. As Carney veers away from his forward guidance initiative the risks of a premature interest rate rise far outweigh that of waiting a little longer.

On a day with very little data released from the Eurozone, exchange rate movement was seemingly centred on the ECB monthly report – whereby President Draghi proposed new economic rules in the Eurozone to promote greater integration. The rules are designed to stave off the economic disparities that have led to the sovereign debt crises among the periphery countries in the Eurozone by providing Eurozone government’s new independent powers to take action to improve the competitiveness of their economies. The comments did little to boost the Euro though and the currency remained on the back foot. Elsewhere in the Eurozone pressure was placed on the single currency as an alert was issued regarding the Portuguese banking sector. Shares in one of Portugal’s biggest banks fell 17% following speculation regarding accounting irregularities at its parent group – Banco Espirito. Market participants will be closely eyeing any updates to this development, as Portugal only exited its bailout programme last month and confidence in the country's fragile economy has just returned. This sca¬ndal could lead to renewed concerns about the health of the country's financial sector, which could leak into the Eurozone as a whole.

The US continued its run of good employment data yesterday, with an unemployment claims release printing 304k, against a best consensus of 316k and 315k previously. Despite the near constant stream of positive fundamental economic data stateside the greenback still cannot build momentum following short rally bursts. In many ways the US is in a very similar position to the UK, whereby economic growth and employment have returned to sustainable levels sufficiently to warrant the central banks sit up and consider an interest rate rise. So in the currency markets why is the greenback underperforming when the Pound has gained around 5% against most major this year? Elsewhere saw FOMC member Fisher speaking in his new role as vice-chairman of the FED. The former vice-chairman of Citigroup stated that while much progress has been made in the US financial sector, the problem of too-big-to-fail banks persists. These comments were poorly timed and the markets have digested the news alongside the aforementioned Portuguese banking scandal, putting the US Dollar once again on the back foot.