Good morning,
Carney punctures rate hike hopes
While a speech by the Governor of the Bank of England may not have had the greatest effect on sterling yesterday it was not long until the politics of coalition building in the UK reared up to throw more confusion into the outlook for the pound.
Mark Carney’s speech singlehandedly punctured a lot of the belief that the Bank of England is close to raising interest rates in the UK anytime soon. Carney noted in his Mansion House speech that was delayed from last week given the fire at the Grenfell Tower that inflation pressures in the UK remained subdued and therefore this was not the time to start raising interest rates. Before he spoke the probability of an interest rate rise by the end of next year were 75%. As of this morning they have dipped to 48%.
The next Bank of England meeting will likely see fewer votes for a rate rise, purely as a function of the departure of Dr Forbes, however we must pay close attention to speeches from MPC members to see how shored up the Governor’s back may be on the decision to hold rates for a while longer.
Queen’s speech may be quite short
Sterling did not collapse yesterday but its fall was accelerated by reports late in the day that the Conservatives and the Democratic Unionist Party are still very far apart on any agreement to support the Conservative government. Today is the Queen’s speech and while the Queen will read out a shopping list of plans and progress that Theresa May’s government want to get on with, she currently does not have a majority from which to govern.
While this may sound a lot like politics for politics sake there are real issues over how long a government could function. Any ‘Great Repeal Bill’ is surely dead in the water for now and any call of no confidence in this government could easily be used by the DUP to extract as much political capital as possible. Of course, this could all lead to another general election. We’re getting slightly ahead of ourselves and although the Queen’s speech is today the vote on it is next Wednesday and therefore Theresa May and team have another week to bolster any agreement between them and the DUP.
Overnight a group of Labour and Tory MPs have put their stakes in the ground on Brexit. The horse has bolted and unfortunately, it’s also been shot.
Sterling could easily rebound on a deal
For now the pound needs only a ray of good news and it could easily hit back pretty quickly, the mood for sterling is not as dark as it was earlier in the year but an agreement would be enough in the short term to stall this grind lower.
The Day Ahead
The focus will once again fall on Westminster today with a data calendar lighter than most for the markets to be distracted by. Sterling is not the only game in town by a long shot but it is certainly one that has market participants enthralled.
Demonstrations are scheduled in the capital today as a protest against the policies that some believe contributed to the fire at the Grenfell Tower last week. Some fringe elements have called for a ‘Day of Rage’ and my mind casts back to when London and other parts of the UK were hit by riots in 2011 following the killing of Mark Duggan. The riots and general unrest lasted for 5 nights and resulted in the deaths of five people. Scenes similar would cast an even greater shadow over the pound; sterling fell by 1.74% as a result of the unrest in 2011.
Have a great day.