Carney hints UK interest rates may rise at “turn of the year”
17/Jul/2015 • Currency Updates•
Yesterday was a mixed day for Sterling, which ended the London session 0.15% lower against the US Dollar and 0.35% higher versus the Euro amid a lack of data out of the British economy.
The currency strengthened to a fresh seven-and-a-half year high against the Euro, boosted once again by traders betting that the Bank of England will raise interest rates early next year, following on from Wednesday’s impressive wage growth figures. This was fuelled further by hawkish words last night from Bank of England Governor Mark Carney, who claimed interest rates may be hiked at the turn of the year. At a speech at Lincoln Cathedral, Carney said he expected rates to rise gradually over the next three years to around about half the historic average, or 2%.
The only economic release we saw yesterday came in the form of the Conference Board’s leading economic indicator. The index, which measures future trends in overall economic activity, decreased by 0.4% to mark its first negative print since December and largest decrease in three years.
No data out in the UK economy today could mean limited Sterling volatility, although of course this is highly dependent on events elsewhere.
Despite some positive noises out of Greece and optimism from the ECB, the Euro dipped by 0.5% versus the Greenback yesterday.
The main news out of the Eurozone yesterday once again concerned Greece, with Eurozone finance ministers agreeing to grant Greece a €7bn bridging loan in order to keep finances afloat until its bailout is approved. This is expected to take place on Friday. There was another positive development, after the European Central Bank agreed to increase its emergency liquidity assistance to the country for the first time since it was frozen in June. The ECB will grant a further 900 million Euros in ELA over the coming week in a bid to re-open Greek banks.
Speaking at the latest monetary policy statement yesterday, President of the ECB Mario Draghi underlined his assumption that Greece would remain part of the Eurozone. In a rare move, Draghi threw his support behind the bailout package, although warned caution was required when banks reopen to avoid a bank run. In terms of the Euro-area wide economy, Draghi continued to be positive, and while global and financial risks were discussed, these are not seen as worrisome enough to the governing council.
Earlier in the day, consumer price growth remained unchanged at 0.2%, while the trade surplus decreased, down from €24.9B to €18.8B in May.
A rather muted day in the Eurozone economy today, with the only announcement of any note being construction output at 10am UK time.
The US Dollar index rallied by 0.4% yesterday as traders continued to expect an imminent interest rate hike in the US.
Fed Chair Janet Yellen spoke again at the testimony to the Congress yesterday. However, this was mostly a non-event in terms of monetary policy announcements, largely overshadowed by economic releases and events in Greece. In terms of economic data, jobless claims pointed to a solid US labour market, having fallen more than expected last week. Initial claims for jobless benefits decreased by 15,000 to a seasonally adjusted 281,000 last week, in the process reversing the prior week’s data and ending three straight weeks of increases. The four week moving average remained strong, although increased slightly to 282,500. Meanwhile, the Philly Fed manufacturing survey disappointed, slowing to a four month low in July, down from an index of 15.2 to 5.7, driven lower by declining new orders.
The latest inflation data for June is due at 1.30pm this afternoon in the US, with price growth expected to print positive for the first time since January.
Rest of the world
The New Zealand Dollar was one of the worst performing world currencies yesterday, tumbling to another six year low as falling dairy prices and soft inflation provided another strong case for a further interest rate cut at next week’s monetary policy meeting.