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Inflated Brexit

BoE and Brexit GBPEUR has been range-bound this week €1.12 to €1.13 following Thurday’s sudden drop into the 1.10s. This morning UK inflation data briefly boosted the £. The reading of 3% was expected, reaching the highest level in 5 ½ years and is at the upper bound of the BoE’s threshold target of 2% plus or minus 1%. If inflation rises above 3% the Governor of the BoE, Mark Carney, who chairs the 9 strong Monetary Policy Committee (MPC) will need to write an open letter to the Chancellor explaining why inflation is elevated, offer the committee’s proposed remidy and detail the length of time they expect inflatio rates to overshoot their target. Coincidently MPC members spoke shortly afterwards in pariliament and although many bank analysits are prepared for a November interest rate hike it’s clear we remain vulnerable to any economic slowdown related to Brexit or to any poltical deadlock in negotiations. We could therefore see the recent supporter for the pound fade. Mark Carney, Governor:   “I think it’s more likely than not that I will be writing on behalf of the MPC a letter to the chancellor. We expect that inflation will peak in and around the October figure, October-November figures, peaking potentially above the 3 percent level.” Silvana Tenreyro, external member of MPC, said she’ll only vote for a rate rise in the coming months if economic indicators are in line with current expectations, otherwise she’ll wait. David Ramsden, Deputy Governor On Interest Rates “I voted to maintain bank rate at a quarter percent. A majority of MPC members saw a case for removing...

BoC softens tone GBPCAD higher

Last night the governor of the Bank of Canada (BoC) said thee central bank will proceed “cautiously” with additional interest rate rises. The economic situation is less certain and inflation “surprisingly soft”. Many had expected an additional rate rise in 2017 but this is now less likely. The BoC have lifted interest rates twice this year, once in July and earlier this month. While monetary policy is data-dependent and therefore subject to change, this fresh assessment does help GBPCAD move higher. GBPCAD has gained over 5% since the 4th of...

US dollar weakens after Fed minutes, contrary to recent forecasts

The US central bank released their July meeting minutes, this evening, which highlighted the overall inflation rate (excluding volatile food and energy prices) has declined over the past 12 months and not expected to climb above their 2% target until the “medium term”. As a result dollar bulls have been stifled and the dollar weakened against the euro. Two such bulls are Goldman Sachs (GS) and UBS. Today GS signalled a modest pullback to €$1.15 is most likely, postulating that positive global growth will lead central banks to move closer to [interest rate and balance sheet] policy normalisation. UBS made a similar call yesterday. Mark Haefele, global CIO of UBS, argued the US may pass a tax reform package or raise the debt ceiling which could benefit the US dollar in the short-term (6 months).  Although the US Fed could increase interest rates again this year, the consensus view is December, with many now thinking this will be delayed until next year due to inflation being stuck below 2%. The central banks’ members could talk more about reducing monetary support, however,  as often is the case, the speed respective central banks (ECB /US Fed) adjust its stance on policy will impact currency movements. The next important US central bank meeting is on the 20th September and will be watched for comments on any change to interest rates or discussions on shrinking the assets on the Fed’s balance sheet.    The US dollar started the year in the low 1.05’s against the euro and is at 1.17 currently, equating to a 12% weakening in under 8 months.   For reference...