Good morning,
No change from BOE for now
Yesterday’s Bank of England meeting passed with little fanfare and allowed sterling to find a little bit of support; something it has been sadly lacking for over a month now. Interest rates were maintained at 0.5% following an 8-1 vote in favour of no change in policy.
The decision of Ian McCafferty to maintain his vote for a 25bps increase in interest rates is an important one. His argument for doing so was founded in the belief that domestic inflation is soon to pick up and that there is little opportunity to be found if the Bank of England falls behind the curve, and is left in a position where rates may have to rise faster than they would want.
Support of wage inflation
Of course, inflation is like a summer holiday at the moment; everyone remembers what one feels like but can barely remember the last time it happened.
The Bank of England maintained that the impulse on inflation from abroad was depressing any home grown price rises. Sterling and its recent falls against the US dollar and euro were also mentioned as contributing to inflation but we well know that the transmission of this into prices is wholly outweighed by what is going on in oil markets.
Moving forward with the pound, the discussion once again switches back to being data dependent; further pieces of data that suggests that Q4 growth saw a slowing of output will keep sterling from turning higher in short order. As has been the case for a number of months now, data from the jobs market is still the most crucial for policy makers and a continued tightening of the labour market with rising wages puts a May rate rise still very much in the ‘possible’ camp.
Wider issues such as the increased fiscal retrenchment the Conservative government is planning, alongside continual fears over the UK vote on EU membership, are all part of the sterling price too and will remain pressures until clarification is found.
Asia quiet, oil weak
Asian markets have been quiet overnight and for the most part of this week following the People’s Bank of China’s decision to leave the reference rate of the Chinese yuan relatively unchanged through the week.
Price action overnight has been confined to commodity currencies, and the Canadian dollar in particular. While there has been no news or headlines to drive the weakness in the loonie, the market on whether the Bank of Canada decides to cut interest rates at its meeting on Jan 20th have swung very much in favour in the past week or so. This is despite the weakness in CAD doing a lot of the leg work for the central bank already, as well as comments from Governor Poloz to suggest no change is forthcoming.
The Day Ahead
In an atmosphere of global trends and flows the data calendar can get lost rather quickly. Yesterday’s European Central Bank minutes showed a very divided group of policymakers but the market took little notice; China, a lack of liquidity and US rate rise expectations still dominate the psyches of traders.
That being said, the retail sales number from the US is always interesting. Sales are expected to rise by 0.2% on the month.
Have a great day and a better weekend.