August 1 2019

Aug 1, 2019 (Econoday) – The August BoE MPC meeting again lived up to market expectations and left policy on hold. Bank Rate remains pegged at 0.75 percent and the ceiling on QE at £445 billion (of which gilts, £435 billion). The vote was another unanimous 9-0.

Sterling resumed a slide against the greenback that knocked it to 2 ½ year lows.

The MPC also opted to retain a tightening bias under which the Bank believes that ‘‘..increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2 percent target..”. However, compared with June, the bias has been modified slightly and higher rates now require both a smooth Brexit and some recovery in the global economy. In line with the Fed and a number of other central banks, the UK monetary authority would seem to be attaching increasing weight on international developments.

Under its central case scenario (smooth Brexit), CPI inflation is expected to climb on the back of excess demand and stand at 2.4 percent at the end of the 3-year forecast horizon. In other words, the current stance of policy and market pricing for borrowing costs in the future remain too accommodative to meet the medium-term inflation target. Interestingly, the Bank still sees excess demand even in the event of sterling appreciating by as much as 10 percent.

Brexit uncertainty again ruled out any policy shift today but the new Quarterly Inflation Report (QIR) still shows no quantitative analysis of what a no-deal outcome might mean for GDP and consumer prices. In line with previous meetings, the August minutes adhere to the official line that any monetary policy response to whatever shape Brexit finally takes will not be automatic and could be in either direction.

Apart from the amendment to the policy bias, there is little here for financial markets to chew on. The next move in official rates could be up or down but, in either eventuality, the chances are that it will not be for some time.


USA 

July 31, 2019 (Western Union Business Solutions)  – If this week’s Fed meeting was a test of dollar strength, the U.S. unit passed with high marks. The dollar cruised to new highs after the Fed fired its first rate cut in a decade. The greenback clocked May and June highs against the yen and Canadian dollar, respectively, and motored to its strongest in over two years against the euro and sterling. The dollar took comfort from the Fed maintaining an upbeat outlook for the world’s biggest economy. Dollar bulls were particularly emboldened by the Fed ruling out a “lengthy” rate cutting cycle, dubbing its action as a mere “mid-cycle” rate adjustment. Markets responded by scaling back expectations of lower U.S. interest rates, thereby assigning a brighter outlook for the greenback. The dollar faces more tests of strength in U.S. data today on manufacturing and tomorrow on the job market.

EUR

A hawkish rate cut from the Fed this week drove the euro through a key floor to its weakest level in 26 months against the greenback. Meanwhile, data Thursday confirmed the weak state of Europe’s manufacturing sector, a key growth engine for the export-driven economy. European numbers this week showing lower inflation and a sputtering factory sector intensified pressure on the ECB to deliver stronger stimulus at its next meeting in September.

GBP

Sterling resumed a slide against the greenback that knocked it to 2 ½ year lows. No Bank of England rescue for the pound, as all nine officials voted to keep interest rates at a low 0.75%. Britain’s central bank also downgraded its outlook for U.K. growth this year in the face of turn for the uncertain Brexit has taken. The world’s No. 5 economy, meanwhile, remained stuck in a soft patch as data confirmed British factory activity contracted from the third time in as many months in July.

CAD

Canada’s dollar tumbled to six-week lows against the greenback after the Fed cut rates but played down prospects of a “lengthy” easing cycle. USDCAD’s buoyancy will face scrutiny in U.S. and Canadian data Friday on trade. However, the main focus tomorrow will be on America’s employment report for July. Solid job growth would weaken the case for the Fed to follow up this week’s rate cut with another anytime soon, a scenario that could push USDCAD higher.

America’s dollar reigned as it rolled to new highs for the year against a wide swath of rivals. Any rate cuts by the Fed appear to be modest instead of the bolder cuts that market had priced in. The Fed cut rates this week for the first time in years but it signaled the move was more insurance to safeguard the economy from global headwinds. The Fed upended market expectations of three or more rate cuts by year-end, resulting in a brighter outlook for the greenback. How high the bar is actually set for rate cuts should hinge on U.S. data. That puts the focus on today’s ISM manufacturing index and tomorrow’s influential nonfarm payrolls report. Prints that back the Fed’s favorable baseline outlook for the U.S. economy would bode well for sustainable dollar gains.