Mark Carney pushes Sterling into new highs as interest rate hikes become a reality!

Week commencing Monday 16th June 2014

This week in Short

  • In the UK we have CPI, the Bank of England minutes and Retail Sales to look forward too. After Mark Carney’s Mansion House speech, we expect the minutes to provide the best chance for Sterling volatility.

  • In the US we have a reasonably quiet week, with the FOMC concluding their meeting while CPI and the Philly Fed are also on the agenda. We expect the usual USD 10 billion taper from Janet Yellen this month, which CPI is expected flat and the Philly should post a second month of moderate declines.

  • In Europe we have the CPI release followed by the ZEW for both Germany and the Eurozone. CPI should be an interesting release, given the disinflation we have seen in that area over this year. The ZEW is expected to start posting some decent numbers, potentially pointing towards a rebound as we move into the second half of the year.

Overriding Market Themes

Sterling has quite a week last as Mark Carney, governor of the Bank of England, hinted that interest rate hikes could come earlier than the markers had been expecting. The Pound neared a five year high against the dollar on Friday, while UK stocks fell after the Bank of England chief’s announcement at the Mansion House, bringing forward expectations for a first UK rate hike to before the end of this year, from the first quarter of 2015. A possible rate hike by the Bank of England by the end of 2014 would make it the first major central bank to normalise monetary policy since the start of the global financial crisis in 2008. The hike would also likely be at least six months before any similar action from the US Federal Reserve, and contrasts sharply from the European Central Bank, which had to cut interest rates this month and has signalled it is likely to ease policy in the coming months.

Sticking with the UK, Credit agency Standard & Poor's upgraded the UK's credit outlook to "stable" from "negative" and kept its AAA assessment of borrowing strength. The agency was the only one of three mainstream credit rating agencies which did not drop the UK’s debt score from its treasured AAA status, instead put the country on negative watch. Rival agency Fitch said it kept its AA+ credit rating for the UK and gave it a "stable" outlook, citing the country's accelerating economic recovery. Within the Standards & Poor’s report, the agency forecast that the UK economy would grow by almost 3 percent this year, with considerable upticks in construction and the services sector. The agency followed on to forecast that the UK economy would expand by 2.5% in 2015, led by business investment and private consumption.

Meanwhile, the UK construction industry saw another increase in output in May, although the sector's momentum continued to ease. The monthly Markit/CIPS PMI index fell to 60.0 in May, compared to a 60.8 print in April. Despite being firmly above the critical 50.0 level of expansion, it was the slowest pace of expansion for the industry since October last year. Diving into this report, the slower than expected growth can be partially blamed in a moderation in commercial building activity, which saw its weakest expansion in seven months. House building remained the key driver, despite the pace of construction easing to a fresh three month low. On the flip side of construction, Input buying accelerated at its fastest pace in more than three months, with the report citing increased lead times among suppliers struggling to cope with the volume of orders.

 GBP This Week

In the UK we have a reasonably mixed week ahead with CPI, the Bank of England minutes and retail sales stealing the show. Starting with Tuesday’s CPI release, the market is expecting a drop back to the 1.7 percent level. Despite this representing a drop in inflation, we doubt that this will cause too much issue for the Bank of England, especially as it still remains at its near 2 percent optimal level. Thus, we doubt that this will be any threat to the current Bank of England monetary policy framework, and therefore should be a reasonably quiet event.

Moving to Wednesday, we expect the release of the monetary policy minutes to restart the discussions as to when we are likely to see an interest rate hike in the UK. This obviously follows on from Mark Carney’s comments last week, and therefore expect traders to be dissecting this report to find any hints of exactly when the Bank seem to be considering adjusting base rate.

Finally, the all-important retail sales figure for the UK is due to be released on Thursday, with the market expecting the indicator to fall back into the red for the first time in four months. This should not be seen as a structural deficiency in the currency UK economic performance more that after months of significant growth in this indicator, finally consumption has started to ease. Despite that note, the role of the consumer in driving the UK economy forward to key, so any negative release is likely to act as a drag on an already inflated Sterling.    

USD This Week

In the US we have the latest round of CPI followed by the Philly Fed manufacturing index to look forward too, as well as the FOMC on Thursday. Starting with the FOMC then, despite these announcements becoming rather predictable recently, we could still see some activity on the markets especially if any policy tool is adjusted. However, we expect the usual USD 10 billion taper this week, especially as non-farm jobs continue to reside above the crucial 200k mark with this month’s print of 217k already in the bag!

Moving to CPI, estimates are pointing towards a stable level of 0.2% for the quarter, with the annual level looking to settle at around 1.7%. Much like the Bank of England, this is a reasonably comfortable level for the Federal Reserve and does not pose too much in the way of deflationary risk. However as always, should we see a print considerably lower expect the Dollar to react accordingly.

Finally, the Philly Fed manufacturing index figure for the month is expect to show a further retraction from its previous highs in March, pushing back towards 14.8. This is a reasonably weak release, therefore we doubt that it will have much impact on market sentiment as we move deeper into the week. Also, given that we saw a huge upside move a couple of months ago, many traders are expecting a reasonably weak release in the next few months to counter.

EUR This Week

We have a reasonably quiet week ahead for the Euro, with the release of CPI inflation and the ZEW economic sentiment numbers the only events of any note. Monday’s CPI release can be seen as critical, given the disinflation we have witnessed within the zone this year. This month, we expect both the core and non-core CPI to come in flat, so we doubt that markets will react too violently to the news. However, a further move to the downside means that the pressure will be on the ECB to avoid deflation or else QE could be on the cards down the line.

Moving to Tuesday’s ZEW economic sentiment figures for Germany and the Eurozone. We expect to see a reversal in the German figure, following five months of consistent downside pressure. Should this happen, it could potentially point to this indicator bottoming out, thereby giving both German and global investors some cheer about a potential German/Eurozone rebound later on this year. 


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