GBP unable to refuge in solitude

With the US markets closed yesterday courtesy of the Martin Luther King Day holiday, most movement was indeed sideways through the session. Despite this, sterling still found the environment rather challenging, pushing to fresh lows before recovering somewhat over the Asian session.

Vlieghe not eager for higher rates

Bank of England policymaker Gertjan Vlieghe is the newest member of the Monetary Policy Committee but has started to flap his rather dovish wings already. Speaking last night at the London School of Economics, Vlieghe told the audience that the UK economy may have been in a more positive position than it is now had the Bank of England taken interest rates into negative territory in response to the credit crunch and the Global Financial Crisis.

Looking forward, the dovishness kept coming with Vlieghe saying that if further ‘disappointments’ were seen then the next rate move would be lower. That being said, he did presuppose that the MPC’s next impulse would be an increase in the base rate.

The key phrase from his speech, however, was “I do not see convincing evidence yet of upward momentum in pay pressures. With growth still slowing, and inflation pressures either easing outright or disappointing relative to forecasts, I do not believe the conditions are in place to warrant a rise in bank rate.”

We have a new arch dove at the Monetary Policy Committee – a secure vote for no change in rates any time soon.

Carney to weigh in on inflation at noon

Mark Carney, the Bank of England Governor and Vlieghe’s boss, speaks at noon today and has the ability to end this collapse in sterling. Carney’s speeches in the past – the Mansion House speech in 2014 and the speech at Lincoln Cathedral last year – have shown him to be leaning towards higher rates sooner rather than later. The stymying factor has been inflation but there is a decent chance that Mark Carney positions himself to look through the lower headline inflation rate in favour of a rising core inflation rate.

Core inflation has been one inflation measure that improved in the second half of last year, and which I believe may continue to increase, as factors like the National Living Wage and higher rents weigh. The Bank of England was happy to look through high inflation in 2008/09 – driven by high oil prices – and the mirror image may be presented by Carney later this morning.

Before Carney takes the stage, we will receive the latest UK inflation numbers at 09.30. Headline inflation is expected to grow to 0.2% on the year as some of the declines in oil and strength of the pound seen in the last weeks of 2014 fall out of the statistical calculations. Further headline gains look less likely, however, as continual oil price weakness and GBP strength will maintain pressure on prices but as mentioned above, there will be a focus on what happens in core prices.

China GDP is dependably stable

Overnight news from China has seen GDP grow by 6.9% through 2015, as near as makes no difference to the government’s 7.0% growth target. Near term weakness is a by-product of the restructuring of the economy and fears of a hard landing. There is little in this release that moves us to change our expectations that some form of fiscal and monetary stimulus will be seen in to the Chinese New Year holidays in the early part of February.

Through the rest of the session we also have inflation from the Eurozone which is expected to remain around 0.0%.

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