Morning Report: 9 October 2015

9th October 2015

GBP Yesterday’s dovish Bank of England minutes did not halt sterling’s continuing rally against USD, but GBPEUR has failed to make any further upwards progress since then. Yesterday’s Monetary Policy Summary showed the BoE stepping well away from any prospect of a rate hike in the near future, with members unconvinced that any upwards cost pressures from higher wages will be sufficient to push inflation up to target. External factors such as weak global demand and continued softness in commodity prices also weighed on the inflation outlook. All in all, the rift between the BoE and the US Federal Reserve has become quite striking: the Fed seems willing to take low employment at face value and hike rates in anticipation of a tight labour market pushing up inflation. In contrast, the BoE is unwilling to make such an assumption, and it now seems that unless the labour market becomes obviously hot and bothered, or external factors improve dramatically, low rates are here to stay. The UK’s Trade Balance will be released today at 09:30 BST.

EUR EURUSD has several swings of more than half a percentage point yesterday during a volatile session that saw the euro ultimately close stronger vs USD. A number of factors drove the volatility, including weak German export data, and meeting minutes from the European Central Bank. September’s Trade Balance data for Germany saw the sharpest month on month drop in exports in six years. The 5.2% decline reflects a sharp deterioration in external demand from emerging markets. Meeting minutes released by the ECB contained few surprises, and showed that the Bank was reasonably happy with how its bond buying programme was going, and would intensify in the immediate future to compensate for an expected slowdown in liquidity over December. The usual uncertainties about the outlook for inflation remains, but as yet there appears to be no decisive drive within the ECB to expand the pace of its current monetary policy accommodation. This morning’s trading has seen the euro open with a burst of strength off the back of strong French Industrial Production data, but no further data will be released.

USD Yesterday’s Federal Open Market Committee meeting minutes may have given the dollar a temporary burst of strength against the euro, but this was short lived and ultimately the greenback’s downwards trend this week appears to be intact. US equities moved higher after the release of the minutes, usually a sign of optimism that the Fed will keep monetary policy loose for longer. The minutes themselves were predictably dovish, showing a Fed that was concerned with a weakening international outlook and beginning to question its own prevailing expectations that rates would probably rise this year. The fact is, the Fed is not entirely sure what should happen to rates: on one hand, the economy is slowing and the global economy is looking increasingly shaky. On the other, the labour market will probably continue to see modest gains and is already showing signs of tightness. The next few months of data, and international developments, will determine exactly how the Fed proceeds. Other evidence of a tight labour market emerged yesterday: Initial Jobless Claims fell to a 42 year low, despite the fact that the labour force is considerably larger than it was in the 1970s. Today at 13:30, Import Price data will be released, followed at 14:10 by a speech from the Fed’s Lockhart.

CAD The brief interlude seen in CAD’s rally this week during the first half of yesterday’s session ended with the release of FOMC minutes in the US yesterday. The loonie is now stronger against USD than it has been at any time since August. Today’s labour market data at 13:30 BST is therefore important for securing these gains, after several months of sluggish activity in the Canadian jobs market.

UK News

  • Reuters. UK think tank sees more poverty, countering Cameron’s message: Up to 200,000 households with people in work in Britain will be pushed into poverty by the government’s latest welfare reforms, according to a report published a day after Prime Minister David Cameron promised an “all-out assault on poverty”.
  • Reuters. UK inflation expectations edge up in September: The British public’s expectations for inflation in the next 12 months rose slightly in September, according to a survey published on Thursday.