Last week, the pound fought back to pre-Brexit levels, registering a week high of 1.3620. Also, we saw the UK Monetary Committee vote 7-2 in favour of leaving interest rates on hold, as was expected. There were a few who thought we could see committee member Haldane push for a hike, therefore, delivering a 6-3 verdict, but this was not the case. The initial move in the pound was very slightly lower but, as the comments from Governor Carney were released, this quickly reversed, as he was seen to be taking preparatory steps in warning the market that rate hikes are coming. On Friday this was further underlined by comments from MPC member Gertan Vlieghe, when he said he may support raising interest rates sooner. Now, we already knew that 2 members of the committee are pushing for immediate action but Vlieghe is perceived as one of the most dovish on the committee, so this came as a real surprise, resulting in the push to the 1.3620. We currently have a situation where the markets are seeking a rate hike in 2017 in order to control rising inflation. The big questions are, “will they act this year?” and “will it be a single hike or multiple?” We have Mark Carney speaking late in the London session today, so all eyes will be on him for guidance.
As usual, North Korea remains a concern, after another missile was tested over Japanese territory. However, one thing that was notable, was the market’s reaction to this event. There was, of course, a risky move as it was announced, but the move was less than we have become used to and the recovery was considerably quicker. As it is becoming more commonplace, the market’s reaction is certainly becoming reduced. North Korea are bearing the brunt of the Oil sanctions imposed by the UN, with China and Russia condemning North Korean actions and stepping up actions supporting the US and UN.
In the US we have the Federal Reserve monetary policy committee decision on Wednesday. The expectation from analysts is that the Fed will leave interest rates unchanged. It is expected that any volatility will be due to comments from Fed Chair, Janet Yellen. In particular, we are looking at a time horizon for the shrinking of the US balance sheet (consensus expectation is October) and how the committee plan on tackling their worryingly low inflation problem. Many are pricing in a December hike, but her thoughts on whether inflation would have to be closer to their target level to permit this will be key.
After proving that he can sit down with Democrats whilst agreeing on aid packages in the aftermath of the recent hurricanes, there is some optimism growing around Donald Trump’s tax reform proposal, with him due to give a speech tomorrow at the UN General Assembly in New York.
Have a great week