Bank of England member Forbes highlights dangers of delaying rate hike
18/Aug/2015 • Currency Updates•
Sterling suffered throughout yesterday against the US Dollar, despite hawkish comments from a Bank of England member. The UK currency depreciated by 0.4%.
The major news story in the UK as far as Sterling was concerned came from Bank of England policymaker Kristin Forbes. Forbes, one of the MPC members that we tipped to possibly hike rates at the latest meeting, suggested that waiting too long to tighten monetary policy could undermine the UK’s recovery. According to Forbes, given a rate hike would take two years to take effect, rates would need to rise “well before” inflation hits the central bank’s 2% target (currently hovering around zero).
Writing in a column for the Telegraph, she also underlined that waiting too long could mean rates would need to be increased at a faster rate than the gradual path the central bank had expected. However, she also pointed out that the Bank would not hike until there was more evidence of on-target inflation. These hawkish comments come a week after former MPC member David Miles implied a rate hike was imminent.
This morning will see a string of economic releases in the UK from ONS at 9.30am. Inflation data will be in focus, with forecasts suggesting that the consumer price index contracted in the month to July, for the first time since January.
A mixed session for the Euro saw the currency finish 0.5% higher versus Sterling, and unchanged against the Dollar.
Trade data released by Eurostat yesterday morning showed that the trade surplus in the Eurozone economy expanded to a six month high in June. The surplus rose by a seasonally adjusted 2.8% to 21.9 billion Euros, its highest level since December last year, despite being slightly down on estimates. This increase was driven by an uptick in exports, which increased by 1.4% on a month previous, while imports rose by just 1.2%.
In Germany, the country’s central bank, the Bundesbank, also released its monthly report, which suggested external demand would fuel a strong level of growth in the second half of the year. Europe’s largest economy is expected to experience rising consumption and growing exports in the next few months, although the central bank warned over risks to the global economy following a slowdown in China.
This week looks set to be another quiet one in the Eurozone in terms of economic announcements. Manufacturing and service sector growth on Friday the only major data points to look out for.
The US Dollar rose marginally against its basket of currencies yesterday as traders continue to shake off worries about a China-led currency war, focusing instead on the possibility of an interest rate hike next month. The US Dollar index increased by 0.1%.
The Dollar rally was fuelled by encouraging housing data in the US. The National Association of Home Builders housing market index, a measure of homebuilder sentiment, rose this month to its highest level in a decade. The index increased to a reading of 61, its highest reading since November 2005, with any level above 50 seen as favourable. The single family home component increased, while the gauge of single family sales expectations remained steady. This impressive data, coupled with an improvement in the labour market, suggests that the Fed is on track for a historic interest rate hike at next month’s FOMC meeting.
On the flip side, the New York Empire State manufacturing survey, a measure of business conditions for manufacturers, suffered from an expected decline, its largest in six years. The index plunged to -14.9 with a rising Dollar hurting exports and leaving factories with too many goods in stock.
Inflation figures in the US tomorrow will take the spotlight this week. In the meantime, housing data at 1.30pm BST this afternoon could cause moderate volatility in the US Dollar.
Rest of the world
The Thai Baht was one of the worst performing currencies in the world yesterday. The currency suffered after a bomb was planted in the Thai capital, killing at least 16 and wounding dozens of others in an attack the government claimed was a bid to destroy the country’s economy.
Meanwhile, the Turkish Lira hit a fresh record low as investors continue to fret about the possibility of a snap election.