Good morning,

Rowing back

Slowly but surely the dovishness of last week’s Federal Reserve meeting is being ever so slightly rowed back by members of the Federal Open Markets Committee. Monday saw Members Lockhart and Williams allude to the still alive possibility of an interest rate increase at the Fed’s April meeting and Member Bullard backed that up yesterday.

Our initial response to the Federal Reserve’s overt dovishness was one of disbelief given the data coming out of the US economy and it seems that Member Bullard is backing this line of thinking up for now. In an interview with Bloomberg TV Bullard stated that “You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April. He also said that he think that the US is “going to end up overshooting on inflation” and the natural rate of unemployment.

That is and has been our argument since December. Raising rates into strength makes perfect sense and today’s durable goods orders number from the US is likely to go some way to continuing that trend.

Pound at fresh lows

Sterling is not calling out for a rate increase at the moment although the support of tighter monetary conditions would aid the pound’s rather fragile backbone. Brexit fears are the name of the game still for sterling with fresh lows seen in GBPEUR yesterday and progressive weakness against the dollar and other crosses.

There is little new news of course, but the duality of less than three months to go until the vote and the continued questions as to what happened in Brussels on Tuesday means for the referendum and safety here in the UK.

April has typically been a good month for the pound. Since 2000, April has seen sterling rise against the US dollar 14 of 15 years. Only 2004 saw the pound fall and of course in both 2010 and 2015 April was subject to a fair amount of political event risk courtesy of general elections. That being said, the level of political risk that the EU referendum poses is on another level and will continue to act as a depressant. We think that there is good case for a push of GBPUSD below 1.40 in the coming weeks.

Today’s retail sales numbers are unlikely to buck up the pound’s ideas either unfortunately as we look for a month on month decline in sales of around 1%.

Nothing doing in Japan

Elsewhere the news that monetary policy may not be the only thing that can solve the world’s economic problems seems to have permeated even the thickest of skulls. Overnight Bank of Japan’s Governor Kuroda stated that one “can’t solve all of Japan’s problems with monetary policy”.

The Bank of Japan left monetary policy intact at last week’s monetary policy meeting as expected, but did indicate a stronger awareness of downside risks to the economy and prices. The economy, it said, has continued “its moderate recovery trend,” and perhaps more importantly, the Bank’s assessment of inflation trends was seen to have “recently weakened”.

It looks like further interest rate cuts and bond purchases are on deck.

We also could see some form of fiscal response by the Japanese government ahead of elections to the Upper House in July. A rise in sales taxes is slated for April 2017 but noises around a cancellation of the increase have become louder in recent weeks.

In other news, I am away for a fortnight from tomorrow but will leave you in the very capable hands of Edd Hardy.

Have a great day and a fantastic Easter break.

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