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New BoE member strikes cautious tone

27-Jun-2018

As luck would have it, when I hit shuffle on my Spotify this morning Mungo Jerry’s “In the Summertime” came on. 

Latest Rates
GBP/USD
GBP/EUR
GBP/AUD
GBP/CAD
GBP/CHF
1.3223
1.1338

1.7904

1.7597 1.3084
GBP/JPY
GBP/HKD
GBP/ZAR
EUR/USD
EUR/GBP
145.16 10.3755 17.9046 1.1663 0.8820
Investec currency forecasts as at 1 May 2018
Q2'18 Q3'18 Q4'18 Q1'18
GBP/USD 1.33 1.39 1.40 1.41
GBP/EUR 1.14 1.15 1.15 1.14
Data releases
09:30 UK BoE Governor Carney speech
17:15 US Fed member Rosengren speech
22:00 NZ RBNZ latest policy decision

Key Levels
Support
Resistance
1.3102 1.3472
1.1338 1.1520

Market overview

As luck would have it, when I hit shuffle on my Spotify this morning Mungo Jerry’s “In the Summertime” came on. I’m uber thankful it was that one rather than any number of the embarrassing ones. It’s a classic which just makes you think of good times and sunshine, even when you’re a hundred feet underground.

Sorry, back to the market. Yesterday the pound came under a bit of pressure as Jonathan Haskel, who joins the Bank of England’s Monetary Policy Committee in September, said there are risks in moving too fast with tightening. That said, he agreed with the bank’s “broad direction” on interest rates. This was enough to push GBP/USD into the low 1.32s whilst GBP/EUR is languishing in the mid-1.13s. Haskel will be replacing McCafferty and the market seems to be taking him to be more dovish than his predecessor. McCafferty will vote on policy for the final time in August and said in a speech yesterday that officials shouldn’t act too slowly in raising borrowing costs, his usual rhetoric. At the moment the market has a rate rise in August, August 2nd to be specific, as a 72% likelihood. A week ago that figure was around 48%.

Outside of these shores the market seemed to take stock and digest recent trade war tussling and overall it made for a quieter day. One thing to highlight in that regard though is White House top trade adviser Peter Navarro saying that by the end of the week we’ll see a Treasury Department report on American restrictions on foreign investments. According to Navarro, such restrictions won’t be as tight as investors had initially feared, which were the cause for a global market rout on the previous trading session. We wait and see. In terms of newsworthiness the big market mover yesterday was oil which rallied after a senior State Department official said that the US is pushing allies to end all oil imports from Iran by a November 4 deadline; no extensions or waivers to the timeline are currently on the table. Brent crude rose 2.4% while WTI ended the session above the $70 mark, up 3.8% on the day.

Meanwhile in the US, Federal Reserve Bank of Dallas President Robert Kaplan commented on the yield curve - a line that plots the interest rates over differing maturity dates - suggesting the short end of the yield curve (shorter term) reflects what the Fed is doing, while the longer end (longer term) responds to factors that include demand for U.S. assets and a dim view on U.S. growth prospects. Specifically he said “Expectations of future growth of the United States is sluggish. That’s what it’s telling you”. Finally, this morning figures from the Nationwide UK house price index showed that annual house price growth slowed to a five-year low in June. Again, London was one of the weakest performing regions with prices down 1.9% year-on-year.

The day ahead

The main attraction today is Mark Carney who speaks at 09:30. Though the speech comes following the release of the Financial Stability Report (FSR), the market will be waiting with baited breath to see if any of his comments touch on the potential August rate hike. At the press conference Carney is expected to say that the financial stability in the UK remains robust, despite the looming Brexit concerns and the recent fall in the sterling. Outside of this, Boston Fed president and now hawk Eric Rosengren speaks at 17:15, Bank of Canada Governor Stephen Poloz speaks at 20:00, and then we get the latest policy decision from Reserve Bank of New Zealand at 22:00. The market sees only a 1% likelihood of an increase with them likely maintaining rates at 1.75%. Meanwhile in the World Cup we have old favourites Brazil and Germany playing to get into the Last 16 which I think they’ll both do. Enjoy the sunshine and remember the factor 50!

Thought of the day

If you missed the heatwave from the last two days then do not worry, it is set to continue on for a little longer. Monday actually marked the hottest day of the year, with temperatures of 29.4C recorded in St James Park and 30.1C at Hampton Water Works. The high temperatures were not just seen in London but also in Scotland and Northern Ireland. Are we in luck this year? Will this heatwave continue on for the rest of the summer? Let’s hope for the best! Perhaps the luck will also move on to the Pound. The Bank of England August rate rise expectation is currently sitting at above 70%. Will they go ahead with this and will they continue their hawkish stance? If so, you would expect a further strength in the Pound. To discuss your FX exposure, call the Investec FX team today.

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