Pound soars as UK moves closer to an interest rate hike
15/Jul/2015 • Currency Updates•
The Pound soared against its major peers yesterday morning after comments from the Bank of England Governor Mark Carney sent the currency higher. Sterling ended the London session 0.8% up versus the Dollar.
Speaking at the Bank of England inflation report hearings before the Treasury Committee in London, Mark Carney’s comments were very much in line with our long standing view; that the time for a first British interest rate hike since the financial crisis is getting closer. Carney highlighted a firming of domestic costs and above trend growth, reiterating the need for a gradual and monitored rate increase. He also claimed that, while there has been a very large move in Sterling in the past two years, a strong Pound is not a dominant factor for the inflation outlook, and would not remove the need for higher interest rates. These comments strongly support our view that the Bank of England will begin hiking interest rates in the first quarter of 2016.
Earlier, there was some disappointing inflation data from ONS. Price growth in the UK economy slipped back to zero percent in June as food and summer clothing prices declined. More worrisome, the core level of price growth declined to its joint lowest since March 2001 at 0.8%. However, Carney believes this will pick up later in the year, and is unlikely to delay an interest rate hike early next year.
There will be more important economic announcements in the UK today, namely the latest wage growth and unemployment figures at 9.30am, both of which are expected to be a GBP positive.
Despite mostly disappointing data, the Euro edged 0.3% higher versus the Greenback yesterday.
Attention was taken away from Greece somewhat on Tuesday following a string of economic indicator data. Consumer price growth in Germany remained unrevised at -0.1% month-on-month in June, driven lower by a 5.9% decreased in energy prices from a year previous. Industrial production disappointed expectations, increasing by just 1.6% on an annualised basis having contracted by 0.4% in May, its third consecutive month of flat or negative readings. Meanwhile, the latest economic sentiment surveys from ZEW were also underwhelming. The sentiment index for the Eurozone declined from 53.7 to 42.7, driven lower by uncertainty in Greece.
In terms of Greece, Prime Minister Alexis Tsipras faced stiff opposition as he struggled to persuade deeply unhappy leftist lawmakers to vote for the austerity measures required to secure a new bailout. Assuming Athens meets obligations and implements these measures, the German Parliament is due to meet on Friday to debate whether to open up new loan negotiations.
In contrast yesterday, today will be a quiet day in terms of economic announcements, with traders in the Eurozone instead turning their attention to Thursday’s inflation figures and the European Central Bank monetary policy statement and press conference.
The US Dollar depreciated by 0.3% against its major counterparts yesterday on the back of disappointing retail sales in the US.
Retail sales in the US economy declined in June for the first time since February, in a sign that consumer spending may be levelling off following a rebound after poor winter weather. Sales declined by 0.3% from a month previous according to the Commerce Department, with sales falling across the board. While disappointing, it is worth noting that retail sales is a particularly volatile measure, and most economists are expecting consumer spending to pick up strongly in the second half of the year. The core measure of retail sales, of which excludes automobiles and food among others, also dipped by 0.1% following a 0.7% gain in May. In a separate report, the lingering effects of a strong Dollar continued to supress import prices, with the Import Price index declining by 0.1% in June
The next major announcement will be inflation on Friday. In the meantime, Janet Yellen will be speaking today at the semi-annual Monetary Policy report to the Congress at 3pm UK time.