Sterling surge brings GBP/USD within reach of 1.35 for first time since June’16
While the Bank of England held rates unchanged yesterday, Mark Carney and his board were making some very hawkish noises once again. With inflation nearing 3%, a majority of the Monetary Policy Committee stated that they believed that some rate tightening would be appropriate over the coming months – something markets certainly weren’t expecting. As they rushed to price in a rate hike as soon as November, sterling surged – a move that has extended overnight – and GBP/USD now looks to test 1.35 for the first time since the week following the Brexit vote in June last year.
Despite the market excitement yesterday, it’s critical to remember that although CPI may top out a little over 3% in October, we expect lower than current levels of inflation by the end of the year. Allied to a picture of a pre-recessional economy and poor wage figures, any increase in interest rates this year would be a mistake. Yesterday’s language will prepare markets, consumers and businesses for when hikes do come and also get some of the inflation hawks off of the MPC’s collective back.
Another weekend, another missile test
Kim Jong-un’s North Korea launched another missile test from Pyongyang overnight, with the projectile flying over much of North Korea itself, over the Japanese island of Hokkaido and landing in the Sea of Japan. While there was no immediate threat to life, the shelter warnings that have to be delivered to Japanese citizens in such an event will be becoming tiresome to the leader of Japan, as well as those of South Korea and will place more pressure on the leaders of the USA, China and Russia to take action. While more sanctions were issued earlier this week, they stopped short of freezing the North Korean leader’s offshore assets and only put incrementally more severe limits on trade into and out of the hermit nation.
The Trump administration’s threat of trade sanctions against each and every nation that continues to trade with North Korea may gain more airplay later today, something which, in the past, has put the dollar under minor selling pressure. Overnight, the yen saw a spell of strength, sending USD/JPY below the 110 mark, but much of that damage has been recouped heading into the European session.
CPI rise not enough to trouble the Fed… yet
After a few consecutive months of dwindling inflationary pressure on both the consumer and producer side, yesterday’s CPI came in slightly ahead of expectations and hit the fastest rate of price rises for over six months. The surge in inflation was primarily driven by energy prices, which rose by close to 3% in August alone (petrol surged by over 6%), but we expect more of this pain to be shown in September’s figures as the longer-lasting impacts to supply corridors in the Gulf of Mexico are felt more solidly.
What does this mean for the Fed? The central bank forecasters will be well aware that the inflationary impacts of energy costs can be reversed as quickly as they emerge in the first place and raising rates for the sole purpose of quashing energy costs will do more harm than good. As such, Yellen and Co are more likely to overlook any rate rise pressure coming from prices today, but will be watching to see if these trends are sustained.
Have a great day.