Carney Goes the Fed Way

Following a change in helm at the BoE, some fresh measures were widely expected and the new Governor didn’t disappoint as he announced that there would be no increase in interest rates until the unemployment rate comes down to the 7% mark. However, the recent improving economic landscape led markets to believe that unemployment could fall quite fast, thereby bringing forward expectations of an interest rate hike and leading the Pound sharply higher against the majors yesterday. Today, upbeat Chinese trade data has limited downside risks in high yield currencies. However, recent hawkish comments from US Fed officials have spurred speculation that the central bank could soon begin to taper its monetary stimulus.

Pound Sterling – UK Markets

The BoE Governor, Mark Carney, linked policy rates to the labour market by stating that the present accommodative policy will be maintained until the domestic unemployment rate falls to 7%, leading the Pound to topple crucial resistance levels against the majors. However, while presenting the quarterly inflation report, Mr Carney opined that the unemployment criteria could be overlooked if low interest rates threaten financial stability, or lead to a rise in inflation expectations. Whilst acknowledging that the economic recovery is gaining momentum, he also stated that growth was expected to be weak by historical standards. Following a rally in yesterday’s trading session, the Pound has taken a breather against the US Dollar and the Euro in today’s trading session. With no major domestic economic releases scheduled today, Sterling is likely to take direction from events across the Atlantic, especially the initial jobless claims report. In tomorrow’s session, the trade balance report in the UK will be tracked by market participants for further direction to Sterling against the majors.

US Dollar – US Markets

In the absence of major domestic economic news yesterday, external cues play a pivotal role in charting the greenback’s direction against the majors. Buoyant German industrial production data and Fitch’s confirmation of the German credit rating led the greenback to weaken against its European counterpart. On the domestic front, the CBO estimated that the US government ran a budget deficit of $606 billion for the first 10 months of the fiscal year. This figure is nearly $370 billion less than the deficit recorded at the same time a year earlier, validating the improvement in the nation’s overall fiscal health. Meanwhile, the Fed of Cleveland President, Sandra Pianalto, echoed similar views as that aired by other policymakers as she stated that the central bank could soon begin altering the pace of its asset purchases, provided the recent improvement in the US job market persists. With the Fed’s policymakers explicitly relating the future policy stand to sustainable improvement in the job market, some volatility relating to today’s initial jobless claims data cannot be ruled out. Also, a raft of important macro data in China due tomorrow has the potential to alter the near term dynamics of the greenback against the majors.

Euro – European Markets

In line with the robust factory orders report, data yesterday revealed that industrial production in Germany surpassed market expectations for June. The single currency, which was already trading on a firmer footing following upbeat data, received a welcome surprise after Fitch maintained its credit rating on Germany at “AAA” with a “Stable” outlook, owing to efforts in over achieving some key fiscal targets. With the Euro zone economy offering signs of a revival, the ECB in its monthly report released earlier today sounded quite optimistic as it indicated that, although certain headwinds remain, the Euro region will gradually recover during the later part of this year. In today’s trading session, the Euro is looking for direction against the majors. With no major domestic economic releases due later in the day, the single currency remains devoid of any independent moves and is expected to monitor events unfolding in the global arena for further cues.

Other Currencies – Highlights

The Bank of Japan, in its latest monetary policy meeting, kept its key interest rate unchanged and maintained the size of its asset purchase programme, indicating that the Japanese economy “is starting to recover moderately”. The central bank Governor, Haruhiko Kuroda, urged the nation’s government to undertake tentative steps to restore fiscal health, warning that failure to do so would diminish the impact of the Bank of Japan’s monetary easing measures. However, gains in the Japanese Yen against the majors proved short lived. With no major releases in Japan due later today, news flows emanating from overseas markets are expected to hold prominence for the Japanese Yen. In tomorrow’s session, the Bank of Japan’s monthly economic report and consumer confidence data will be keenly eyed for further direction.