Carney Dampens Hopes for Imminent Rate Hike

The Pound dropped below 1.70 mark against the US Dollar yesterday, after the BoE Governor down played expectations for rate hikes this year, indicating that there is still “spare capacity” in the economy which needs to be absorbed before raising its benchmark interest rates. Nevertheless, most of the market attention has now shifted to tomorrow’s Financial Stability report, wherein the central bank are expected to adopt some realistic measures to curb overheating in the UK housing market. In Europe, today’s GfK report has indicated that the ECB’s monetary measures implemented earlier this month are beginning to take shape. Across the Atlantic, markets will look past today’s GDP numbers, as recent upbeat reports in the US has reaffirmed that the domestic economy rebounded during second quarter from the weaknesses seen earlier this year.

Pound Sterling – UK Markets

The Pound dropped against its major counterparts following dovish cues by MPC policy makers, while testifying before the Treasury Committee, over the exact timing of interest rates hike. The BoE Governor, Mark Carney indicated that though growth in the domestic economy is expected to be robust during the second half of this year, subdued wage growth indicates that there is still some spare capacity which needs to be absorbed before an interest rate hike could be considered. Additionally, Carney stated that hikes will be dependent on macroeconomic data and will be gradual and limited. Other BoE policy makers, Charlie Bean and David Miles, also echoed similar views, thereby down-playing prospects of imminent interest rate hikes this year. Meanwhile, housing market data released yesterday indicated that BBA mortgage approvals continued to ease for May, although the drop was less than expected. With no major domestic economic release this morning, Sterling continued to trade lower against the US Dollar. The Pound-US Dollar pair is likely to chart further movement in line with the economic releases in the US later today, especially the final GDP numbers for the first quarter and durable goods orders.

US Dollar – US Markets

Yesterday’s data indicated that sales of new homes in the US rose to its highest level since 2008 for May, thereby signaling that housing market is regaining its footing after witnessing a slowdown earlier this year. Furthermore, consumer confidence jumped at the fastest pace in six and half years, thus reaffirming strength in the US labour market and pacifying concerns following soft retail sales growth seen in May. The US Dollar advanced against its peers following upbeat economic releases, however, gains were short lived with the greenback losing momentum in the build up to today’s session. The greenback is trading in a tight range, albeit on a weaker footing against the single currency this morning following better than expected German GfK consumer confidence report for July. Later in the session, the first quarter GDP numbers is likely to be revised lower once again. However, the influence of the first quarter GDP data will be muted on the currency markets, as recent economic data has offered strong evidence of the US economy rebounding following the slowdown in the first quarter. The focus now shifts on today’s durable goods orders data for further clarity on growth prospects for the current quarter.

Euro – European Markets

The single currency is trading in a tight range against its major peers this morning, despite data released earlier today indicating that German GfK consumer confidence for July improved to its highest level in more than seven and half years, facilitated by the ECB’s unprecedented stimulus measures announced earlier this month. Markets will keep a close watch on today’s US final GDP numbers along with durable goods orders report for further direction to risk appetite. Data released yesterday indicated that German Ifo business morale for June deteriorated more than expected amid growing geopolitical tensions in Ukraine and Iraq. The Euro displayed remarkable resilience to the weak German Ifo data, possibly signaling that much of the bad news was already priced in. The single currency gained against the Pound in yesterday’s trading session, as BoE Governor, Mark Carney’s comments yesterday were seen to be not as hawkish as his Mansion House speech earlier this month.

Other Currencies – Highlights

Yesterday, the Japanese Prime Minister, Shinzo Abe, outlined his long awaited growth strategy in an attempt to cement the fragile recovery in the nation and restore its global competitiveness. The so-called “Third Arrow” of reforms, includes a string of proposed changes to the labour regulations, government pension fund investments, corporate governance and tax policies, which according to Japanese cabinet are required to spur corporate investment and innovation. However, better than expected economic releases in the US weighed on the Japanese Yen against the US Dollar yesterday. With a lack of domestic decisive triggers today, the Japanese Yen is trading in a tight range against the US Dollar this morning. Going forward, markets will keep a close watch on US economic releases today for further direction to risk appetite. Separately, ongoing geopolitical tensions in the Middle East are likely to have an impact on market sentiment going forward.