MARKET BRIEFING – LONDON OPEN 08.10.2015
A few months ago there was a strong possibility that the Bank of England Governor would be the first amongst his peers to increase interest rates.
However, with the FOMC Chairwoman Janet Yellen speaking in an overly dovish tone during the September Federal Reserve meeting, the window of opportunity for a Bank of England interest rate nominalization has diminished considerably.
If we now add to the equation, a very poor recent United States Jobs Report and a heightened degree of uncertainty emanating from the Federal Reserve, over their intentions, the task of the Bank of England’s Governor, Mr. Mark Carney has become a more difficult one to say the least.
Not so long ago, the markets had expected the Federal Reserve to make their move and increase US interest rates by the end of 2015. However, with so much changing in recent weeks, the markets have now pushed back the timing of the first rate increase to March 2016.
In the United Kingdom, traders and investors have taken their cue from what is happening across the pond in the United States. With the Bank of England’s, 2% inflation target not expected to be reached by the back end of 2016 the markets have now pushed back the timing of the initial move to happen by late 2016 or early 2017.
Market have not always been very good at predicting interest rates. What is certain is that the Bank of England will not move today and increase the Official Bank Rate from its present 0.5% level. Such a surprise move would be a seismic shock to the markets. The Bank of England is not in the business of delivering shocks as its main policy goal is to ensure price stability.
If one was to discount the possibility of the Bank of England moving on interest rates before the Federal Reserve, what are the factors we need to consider?
From a hawkish, perspective let’s consider the following. The UK labour market metrics, it can be argued are now calling for an interest rate rise to happen ahead of the inflation curve. Furthermore, it should be considered that the current low levels of Consumer Price Index data is a product of low energy prices. If we consider that the current low level of demand for energy and its oversupply to the market is supposed to be a temporary condition, then the current level of inflation is also transitory. Once energy prices move back up to what are seen as prior normal levels, then it can be argued that CPI data will move in step and reach the 2% inflation target that is required by the Bank of England.
There is also a very strong dovish counter argument. The question is where will inflation come from. Commodity prices are still depressed and the Labour market is improving but one would not say that wage inflation has expanded to unmanageable levels.
The call for Mark Carney and his counterpart at the FOMC, Janet Yellen is this. Can they trust the trend in the data sufficiently to make a call on future inflation? This is a very difficult task for all Central Banks as they need to effectively aim at a moving target which is a product of data that is not yet available. A case in point being the extremely bad US jobs data that was released prior to the end of October FOMC meeting.
The current level of inflation and the data that produced this result are known. The question is, can Mark Carney and his colleagues on the Bank of England’s Monetary Policy Committee, with a degree accuracy time their move to ensure that both overtly expansive inflation is avoided whilst at the same time a premature action does not take place which cripples the fragile growth that the UK economy has enjoyed recently.
EURUSD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1.1340
Target 2: 1.1135
Projected range in ATR’s: 0.0104
Daily control level: 1.1210
GBPUSD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1.5415
Target 2: 1.5215
Projected range in ATR’s: 0.0103
Daily control level: 1.5135
USDJPY
The intraday technical outlook
Trend 1 hour: Up
Target 1: 120.85
Target 2: 119.15
Projected range in ATR’s: 0.88
Daily control level: 119.75
USDCHF
The intraday technical outlook
Trend 1 hour: Down
Target 1: 0.9515
Target 2: 0.9650
Projected range in ATR’s: 0.0084
Daily control level: 0.9765
USDCAD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 1.3140
Target 2: 1.2930
Projected range in ATR’s: 0.0106
Daily control level: 1.3135
AUDUSD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 0.7280
Target 2: 0.7125
Projected range in ATR’s: 0.0080
Daily control level: 0.7050
GOLD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1160.50
Target 2: 1130.00
Projected range in ATR’s: 15.28
Daily control level: 1129.50
OIL
The intraday technical outlook
Trend 1 hour: Up
Target 1: 50.00
Target 2: 47.00
Projected range in ATR’s: 1.73
Daily control level: 46.00
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