Dollar runs higher as Fed Chair interviews begin

The search for the next Chair of the Federal Reserve is well underway and the dollar has crept higher following a meeting between President Trump and Stanford University Professor John Taylor. Taylor is the inventor of the ‘Taylor rule’ – a mathematical formula to analyse how appropriate interest rates are based on the level of GDP and inflation within an economy. Under the calculations of the Taylor Rule, interest rates should be 3 times as high as they are now in the US and just under 7% here in the UK.

Trump interviews current Chair Yellen on Thursday.

Five-year high in inflation not enough to boost sterling

UK inflation is now the highest it has been since 2012. The drivers of this increase are obvious; a devalued pound affecting food and oil costs that are imported into the country. While sterling remains at these depressed but relatively stable levels that impetus decreases but could easily re-emerge should the pound take another hit on the basis of ‘no-deal’ Brexit or negotiations breaking down further.

For industries far and wide, raising consumer-facing prices is never an easy decision. But, it’s one that’s clearly being made across sectors as inflation hit its highest level since 2012 in September. With the pound weak, business uncertainty running high and margins being put under further pressure from regulation, competition and a hesitant consumer, prices rose at their fastest pace in over five years. This was particularly evident in the transport and food sectors, who are primarily responsible for tipping CPI to 3% this month. Foreign exchange and international trade dynamics have been key to this figure and that will remain the case until Brexit negotiations are settled – the longer business community remains uncertain, the longer we’ll have margin protection, expensive imports and higher prices.

Separately, Bank of England governor Mark Carney faced a four hour grilling from lawmakers in the Treasury Select Committee and, while he did little to rile the pound, raised expectations of a slower pace of interest rate rises beyond a move in November.

The day ahead

With import & export price index numbers passing by with little ovation or attention, FOMC member Harker is due to speak around lunchtime following commentary from Fed’s Williams, who touted the prospect of a rate hike in December, followed by three further tightens in 2018. In the early hours of tomorrow morning, UK data crosses the wires that could be just as volatile as this morning’s as labor market figures are expected to show earnings still falling short of inflation.

Have a great day.