USD: Yellen gives the dollar a lift
Friday’s inflation numbers from the US were weaker than had been expected but not weak enough, in our opinion, to derail the Fed’s likely rate hike in December. Markets are still pricing in a 77% chance that interest rates will rise before the end of the year as of this morning and Fed Chair Janet Yellen backed up such an assertion in a hawkish speech yesterday.
Yellen told those assembled that “we continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2% longer-run objective.” She added that her “best guess is that these soft [inflation] readings will not persist and, with the ongoing strength of the economy, will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2% longer-run objective.”
These assertions are nothing new but ongoing pricing of a rate hike from December is a lot less concentrated; the next meeting that currently is priced for more with a 50% chance of a hike in rates is next September’s. The dollar is going to have to rely on something else for strength in 2018.
EUR: No clarity on Catalonia
ECB President Draghi said over the weekend that “the bottom line in terms of policy” is that ECB is “confident that as the conditions will continue to improve, the inflation rate will gradually converge in a self-sustained manner” and therefore policy will remain accommodative and prudent.
A Bloomberg article out this morning says that some ECB policymakers have identified a limit of just over EUR2.5 trillion for the region’s quantitative easing programme under the current rules, according to sources. Purchases are set to reach EUR2.28 trillion by the end of 2017 and discussions have likely already begun on what is done with the remaining few hundred million.
The EU summit in Brussels begins this morning with Chief Brexit Negotiator Michel Barnier said to have lunch with PM Theresa May in a bid to unlock the Brexit ‘deadlock’ that the former declared last week.
Catalan President Puigdemont has not clarified whether his address to the Catalan parliament last week constituted a declaration of independence. The letter to Prime Minister Rajoy delivered this morning stated that “More than two million Catalans gave the regional parliament a democratic mandate to declare independence” and that “Our proposal for dialogue is sincere, despite all that has happened, but logically it is incompatible with the actual climate of growing repression and threat.”
GBP: Another crunch week for sterling
It is once again a week of focus on Brexit and the Bank of England that will guide the pound. While Theresa May is in Brussels attempting to unlock the Brexit negotiations, Mark Carney and the UK’s inflation picture will be centre stage. Tomorrow will likely see inflation in the UK breach the 3.0% level for the first time since April 2012. Mark Carney and the newer members of the Monetary Policy Committee are due to testify to the Treasury Select Committee tomorrow morning and while we think that a rate hike is locked in for November, such a prospective decision may be called into question by lawmakers tomorrow.
Have a great day
Jeremy Cook, Chief Economist