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MARK CARNEY TO EXPLAIN (OUR LACK OF) INFLATION

MARK CARNEY TO EXPLAIN (OUR LACK OF) INFLATION

Yesterday’s European trading session kicked off with manufacturing and services PMI reports beating expectations, with the manufacturing reading coming in at 52.8 versus a 52.3 consensus and the services reading printing at 54.6 versus a 54.2 consensus. The manufacturing reading was the highest since April 2014, while the services report, incredibly, saw its highest headline number in four and a half years.

European Central Bank (ECB) policymakers have been unanimous in suggesting that the Central Bank is leaning towards expanding its stimulus program in order to fight deflation and as such – when taking a broader view – the Euro has not benefited versus Sterling or Dollar.

Despite underwhelming economic data out of the US economy yesterday, including a drop in the PMI reading for Nov from 54.1 to 52.6, the Dollar remains bullish in light of the possible Federal Reserve December rate hike. Today’s release of the Q3 Gross Domestic Product report could also support the Dollar bulls with there being an expectation for an upward revision in growth.

Analysts’ best forecasts are suggesting that the US economy has grown by a further 0.5% for the year to date, bringing the overall figure up from 1.5% to 2%. It is clear to see that these predictions are weighted in the Dollar’s favour and create strong hints toward a recovery, whilst also boosting the appeal of backing the Dollar as a direct result of the Federal Reserve’s readiness to hike interest rates.  

Sterling began the week on the back foot as the economic calendar remained empty of any data releases from the UK. Verus the Euro, the Pound ran into some selling interest at a level just shy of a big psychological figure, causing the pair to retrace its steps from last week.

It would seem that some market participants are beginning to fear the potential of a Brexit and that was reflected in GBP/USD yesterday. The pair reached renewed two-week lows after the results of an opinion poll were released, suggesting that a UK exit from the EU will increase the political risk premium, thus providing negative Sterling price action and providing good value volatility for traders.

It seems that the market is trading with an air of caution around the Pound ahead of today’s Bank of England testimony to the Treasury Select committee as many expect the Bank to shy away from forecasting policy tightening. Should Bank of England Governor Mark Carney give any suggestion on forward guidance, we can expect price action to occur accordingly.

Data to watch: 7am German GDP. 10am UK Inflation Report Hearing. 1.30pm US GDP & Personal Consumption Expenditures.

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