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Still waiting on Central Bank’s Decisions

Still waiting on Central Bank’s Decisions

Sterling received a boost in early European trading yesterday with merger activity in the brewing sector as InBev went public with a £68bn bid to purchase brewers SABMiller. Any deal would probably involve substantial purchases of Sterling which in turn would enhance the currency. UK industrial production was stronger than expected with a 1.0% gain for August from a  previous month decline of 0.3%.

The NIESR (National Institute of Economic and Social Research) indicated that GDP (Gross Domestic Product) grew by 0.5% in three months, which was unchanged from the previous release. This suggests a fundamental slowdown as well a weaker than expected reading for the RICS house-price index. With the US Dollar struggling to make headway this enabled the Pound to push to a two-week high versus the US currency.

In the Eurozone German industrial production figures showed an unexpected decline in August, adding to signs that weaker emerging-market demand is weighing on Europe’s largest economy. The shared currency slid versus all but two of its 16 major peers as investors weighed the potential for the European Central Bank (ECB) to expand its quantitative easing (QE) program, which tends to weaken the Euro. QE has lowered the cost of financing for business which has driven expansion in economic activity. There is, however, speculation the ECB may be running out of things to buy as it vacuums up vast quantities of debt. The ECB has amended its mandate to allow itself to purchase up to 33% of any single bond issue, up from 25%, and expanding its policy to include Irish and Dutch mortgage bonds.

The Bank of England (BOE) decision will be watched closely today with most attention focussed on how the vote will be split. If we see a less assertive statement this could put some downward pressure on Sterling and it could potentially lose the ground it has struggled to make over the last couple of weeks. Many feel this will be the likely scenario as market participants expect the Bank of England to be cautiously dovish with the release of the monetary policy statement. Negative pressure via inflation has become somewhat of a sticking point for Mr Carney and co; the market seems geared for the next inflation report from the UK to dictate play. Today, they could reveal a hint toward a change in guidance but those hints are likely to be muted.

The Federal Open Market Committee also release minutes of their September 17th meeting later this evening. The purpose of the minutes are to “review economic and financial conditions, and determine the appropriate stance of monetary policy,” but with much global economic uncertainty and the markets still digesting China’s slowdown any clear indication is unlikely. Consequently, any signal of a rate rise are likely to be unclear too. Overall expect a more dovish tone, with policy makers still needing “more improvement in the labour market” for a rate lift off. Bets on a rise this side of Christmas will be diminishing fast.  

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