Sterling Strengthens on QE Comments
The Pound rallied against the Euro and the US Dollar, reversing some of yesterday’s losses. Sterling jumped when Ian McCafferty, a Monetary Policy Committee member, said that the Bank of England (BoE) should consider unwinding its Quantitative Easing (QE) programme. McCafferty also hinted at voting in favour of raising borrowing costs in August’s MPC meeting.
Janet Yellen’s semi-annual testimony before Congress was the big news on the other side of the Atlantic. The Fed’s Chair said that the Federal Reserve can meet its goals without having to raise interest rates “all that much further.” Market analysts detected a bit of anxiety in Yellen’s comments on inflation for which she said that it is watched carefully.
Pound Sterling – UK Markets
Today, Sterling rallied against both the US Dollar and the Euro. The Sterling to US Dollar exchange rate was set at $1.29. The Pound recovered from yesterday’s eight-month low against the Euro, gaining 0.4% in value and trading at €1.13.
The Pound jumped when Ian McCafferty, an MPC member known for his “hawkish” views, said that the BoE should think about unwinding its QE programme. McCafferty, speaking to The Times, suggested that the BoE should normalise its balance sheet as the US Federal Reserve plans to do. The BoE has announced that the QE will remain untouched until interest rates return to 2%, which is higher than the current all-time low 0.25%.
Default rates on both credit cards and other unsecured lending to UK households have increased significantly in the second quarter of the year. The BoE’s UK credit conditions survey, published today, indicated that defaults are expected to increase further on credit card lending, during the third quarter of 2017. Default rates are on the rise again after a long period of falling, a fact that shows that inflation and the decline of real wages are hurting households.
US Dollar – US Markets
The US Dollar rallied against the Euro with the exchange rate set at €0.87. The market’s spotlight was on Janet Yellen’s testimony before Congress.
The Fed’s Chair said that interest rates may not have to rise that much for the US Federal Reserve to meet its targets. Yellen’s words were similar to those of Fed’s Governor, Lael Brainard, reiterating that rates are already close to a “neutral” level and a significant increase is not needed. “Neutral” level means that the central bank’s benchmark interest rate is neither accelerating nor putting a break in the economy.
Yellen and some of the board members of the Federal Open Market Committee (FOMC) believe that real rate, which is the Fed’s interest rate combined with inflation, should be close to zero as it is right now. The Fed’s Chair noted that additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and achieve the inflation target.
Euro – European Markets
The Euro dipped against the US Dollar, trading at $1.14. The German, French and Spanish final CPIs were published with the figures matching the analysts’ expectations.
A monthly report, regarding the condition of the German economy, was published by the country’s finance ministry. The report suggests that the main drivers of the economy’s acceleration, are expected to be private consumption and the construction sector. The ministry is expecting that imports will rise stronger than exports, which is a critical point of the report since Germany is under a lot of pressure from its Eurozone counterparts to increase spending and reduce its trade surplus.
Klaus Regling, the managing director of the European stability Mechanism (ESM), said that he believes that the Eurozone should have a limited joint capability to support individual member states, in case of a sudden crisis. The German economist suggested that €100bn to €200bn could act as an emergency fund. The head of the ESM said that the introduction of the “European Safe Bonds” would be a great step forward for the Eurozone, but he added that this can’t be done in the foreseeable future.
Other Currencies – Highlights
Sterling slumped against the Australian Dollar, trading at 1.67 AUD. According to Westpac’s research analysts, the Australian labour market has improved with the increase in total employment. Full time jobs have the largest share, but a rise in wage inflation hasn’t been seen yet. The reason is that rising underemployment has forced households to refrain from asking stronger wage rises.
The Pound dropped against the New Zealand Dollar, trading at 1.77 NZD. ANZ published its ANZ-Roy Morgan consumer confidence Index which fell in July, after hitting a five-month high in June. According to the survey, most consumers are optimistic that the next five years will be good for them and the economy. A slight dip was recorded in the number of people who think it’s a good time to buy a major household item. ANZ’s economists suggest that consumer sentiment remains at a strong level overall.