BoE’s Carney Boosts Sterling
The Governor of the Bank of England Mark Carney’s remarks hinting at a potential interest rate hike, have boosted Sterling to pre-election levels. The pound is trading close to the $1.30 mark. Carney delivered a speech to a European Central Bank (ECB) forum in Portugal and suggested that the continued growth in the UK economy could lead to an interest rate hike. His comments are in stark contrast to his Mansion House speech, just a week ago, in which he had said that the UK economy isn’t able to handle the increase of interest rates.
The Governor of the Bank of Canada (BOC), Stephen Poloz, who attended the same forum, joined the group of central bankers, such as Mark Carney, Mario Draghi and Janet Yellen, who seem to be open to raising interest rates. Poloz reaffirmed his will for tightening the BOC’s monetary policy. On the contrary, the Governor of Japan, Haruhiko Kuroda, said that he won’t change his strategies because firms are not spending more, despite the liquidity glut.
Pound Sterling – UK Markets
Today, Sterling rallied against the US Dollar trading at $1.29. The British Pound has now returned to pre-election levels, after falling sharply when the Conservatives lost the majority in the Parliament. The Pound remained stable against the Euro with the exchange rate set at €1.13.
The person behind Sterling’s strengthening is Mark Carney. The BoE’s Governor, while attending an ECB Forum on Central Banking in Portugal, made comments, regarding the hike of the BoE’s interest rates, that surprised market analysts. Carney said that “some removal of monetary stimulus is likely to become necessary, if the trade-off facing the Monetary Policy Committee (MPC) continues to lessen and the policy decision accordingly becomes more conventional.” Carney’s words reveal a sudden shift in strategy, since in his speech last week in the Mansion House, he had said that the British economy can’t handle higher borrowing costs.
Data released by the BoE showed that consumer lending rose by £1.7bn, despite economists’ predictions that it would slowdown to £1.4bn. The report indicated a 10.2% rise in un-secured consumer borrowing, year on year in the three months to May. The figures suggest that households remain confident enough to borrow in order to satisfy their needs, although real wages are getting smaller.
US Dollar – US Markets
The US Dollar dipped to a 14-month low against the Euro, trading at €0.87. The US currency proved unable to withstand the pressure from investors and traders realising that the US Federal Reserve isn’t the only central bank that is considering raising its interest rates. The US Dollar also sank against a basket of major competitor currencies (DXY) to its lowest level since last October.
The Fed announced that the 34 largest banks in the US have passed the second and toughest part of its annual stress test. According to the Fed’s statement, the banks have improved significantly their risk management procedures and have built adequate capital buffers. The Fed approved the plans of the banks to use their extra capital to buy back shares and dividends.
A report by BBH, which is one of the oldest and one of the largest private banks in the US, says that politics in the US will remain at centre stage in the third quarter of the year, affecting the country’s economy. BBH analysts suggest that investors want reassurances that the investigation into Russia’s influencing the last elections in the US won’t interfere with the economic agenda. The report says that it’s critical that the US government raises the debt ceiling and renews the spending authorisation, which expires in September, despite the fact that Trump has already talked about a “good” government shutdown.
Euro – European Markets
The Euro edged up to a 14-month high against the US Dollar, trading at $1.14. Mario Draghi’s remarks in an ECB Forum in Portugal, hinting at a gradual reduction in the ECB’s monetary stimulus, and the weakness of the US Dollar are the reasons for the Euro’s course upwards.
A financial report by BBH suggested that the challenge for the ECB’s policymakers is not growth, but the absence of meaningful price pressures. According to the report, the central bank has a single mandate to retain price stability. Analysts note that “as the economic activity has evolved in the Eurozone, the risk that the euro-area will slip back into recession has been reduced considerably. Although, price pressures are not robust, the risk of deflation has receded.”
Germany’s Chancellor, Angela Merkel, while addressing the German parliament in Berlin, said that she has agreed with the newly-elected French president, Emmanuel Macron, to a middle-term plan for deepening the European Union and Eurozone ties. Merkel also noted that the cooperation between France and Germany will prove decisive for the future of Europe.
Other Currencies – Highlights
Sterling fell slightly against the Australian Dollar, trading at 1.68 AUD. Data released by the Australian Bureau of Statistics (ABS) showed that the labour market continues to improve. Job vacancies in Australia rose for a fourth straight quarter, hitting the highest level since the beginning of 2011. Job vacancies were 6.6% higher in the March-May quarter in comparison with the same period in 2016.
The Pound rallied against the New Zealand Dollar with the exchange rate set at 1.77 NZD. The Australia and New Zealand Banking Group (ANZ) business confidence outlook for June showed that 25% of the firms are optimistic for the year ahead, a much better result than the 15% in May. According to ANZ’s survey, more businesses are planning to invest in new projects and expect a rise in profits. Cameron Bagrie, ANZ’s chief economist, said that all sectors and all regions were strong, but agriculture was excelling.