Sterling rallies strongly on MPC Minutes Hawkishness
22/Jul/2013 • Currency Updates•
Sterling made headlines in an otherwise quiet week of typical lackluster summer trading. The July MPC minutes showed that the MPC voted 9-0 against further Gilt purchases, from a 6-3 vote before Mervyn King left the Committee. GBP promptly rallied against both the euro and the dollar. Outside currency markets, Bernanke’s relatively dovish comments in Congressional testimony further buoyed most asset classes for the second week on a row, and US stocks continued their winning streak by closing the week on a fresh record high.
There were two key takeaways from the July MPC meeting minutes published last Tuesday. Firstly, forward guidance on rates will now become an established policy for the Bank of England. Second, the prospects for any medium-term increase of the Gilt purchase target have evaporated. Committee members were unanimous on both of these points, a rare development for the notoriously fractious MPC. The absence of any near-term prospects for increased QE, and the continued positive tone in economic data, means that we will be revising our forecasts for Sterling higher, particularly against the Euro. Last week brought further positive news on employment, as the number of unemployment claimants dropped by much more than expected in June, and average earnings rose a significant 0.7% m/m saar.
There few noteworthy events or macroeconomic releases in the Eurozone last week. There was some news on the ECB’s push to ease credit to SMEs however. Collateral requirements for pools of SME loans were eased, and eligibility criteria were widened. While this is better than nothing, we were disappointed that the ECB has clearly decided against assuming credit risk by purchasing such instruments directly. We see this as yet another instance of the ECB’s habit of doing the absolute minimum unless and until it is threatened with catastrophe.
Politically, the Portuguese Government crisis is for now being contained, and soaring Portuguese yields have not yet had a significant knock-on effect on other peripherals.The Spanish furor over the slush funds for the governing party is unlikely to lead to early elections, given the comfortable majority enjoyed by Premier Rajoy. Investors were heartened by these developments, and the euro drifted higher against the dollar, buoyed by perceived dovishness in Bernanke’s Congressional testimony.
Last week saw another spate of weaker-than-expected data hit the wires in the United States. Retail sales in June rose much less than expected; excluding automobiles and gasoline, they were actually down marginally. It is also noteworthy that, in spite of decent levels of job creation, unemployment has failed to drop now for four straight months, as somewhat better job prospects attract new entrants into the labour force. All this serves as a reminder that the US recovery remains a fragile thing. We maintain for now our view that the “taper” of QE3 will start in September, but will look particularly carefully at the next two payroll reports to see if the trend towards lower unemployment has stalled. Bernanke made it clear in his congressional testimony that the FOMC is doing the same, and that the tapering will not start unless unemployment continues to fall. Unsurprisingly, the dollar reacted to the soft data and dovish testimony by drifting lower against most major currencies worldwide.