Bank of England Walks Back Tightening Sentiment

Daily Analysis - 19/09/2017

Central Bank Governor Signals That Rate Hikes Will Be Gradual

Following a stellar performance in the UK Pound on the heels of strong inflation and employment data, Bank of England Governor Mark Carney’s caution towards the outlook sent Sterling sliding. Although the Central Bank telegraphed the approach of higher interest rates last week, Carney was quick to strike a more downbeat tone as the Pound’s appreciation threatens overall economic activity.

Carney Comments Drop the Pound

During prepared remarks delivered at the International Monetary Fund in Washington, Bank of England Governor Mark Carney cautioned markets that the pace of any monetary tightening would be gradual and limited in scope. In his speech, he commented on the inflationary developments that could beckon higher rates, especially if they persisted over the coming months. Furthermore, he highlighted growth in the economy, cementing the idea that if the overall trajectory continued to be positive, the Monetary Policy Committee could potentially deem it appropriate to reduce the current level of accommodation and support for the economy. His observations cooled strength in Sterling, quickly sending the Pound tumbling after the UK currency rose to the highest point against the US dollar since the Brexit referendum on Monday. The GBPUSD is currently recovering from Monday’s loss, briefly retaking the 1.3550 level.

Australian Dollar Advances Despite RBA Concerns

Even though the last statement from the Reserve Bank of Australia was positive on balance with Governor Philip Lowe confident that growth would accelerate over the coming year, minutes released overnight highlighted the risk factors confronting the outlook. According to the meeting minutes from the September decision, the level of optimism on the employment front remains high. However, amid sluggish wage growth alongside concerns about the strength in the Australian dollar and expanding household debt levels, the scope of action that can potentially be taken is limited. Although positive developments in job creation are expected to persist, the amount of spare capacity continues to present a troubling development, reinforcing the view amongst market participants that interest rates will not move higher until 2018 at the very earliest.

Euro Area Inflation Spurs Caution Amongst Policymakers

After printing at the fastest pace in four months, headline inflation figures were not warmly greeted by financial markets as the European Central Bank reaffirms its position that price growth may slip through the end of the year. Projections from the ECB indicate that the annualized CPI figure will likely pullback to 0.90%, coming in well-below the Central Bank’s targeted 2.00%. Gains in the figure were predominantly driven by the increase in energy prices which accounted for the lion’s share of the recent upturn, with alcohol, tobacco, and processed food also contributed to the momentum higher. Should higher inflation fail to materialize, the likelihood of monetary tightening vis-à-vis asset purchase reductions will continue to fall, hurting the more hawkish outlook for interest rates. The EURUSD pair is trending higher in early trade, with the pair edging back above 1.2000.

US Homebuilder Confidence Slips Ahead of Key Data

With figures pertaining to US building permit applications and housing starts due later in the session, the early indications for the housing sector are not as bright as the impact of hurricane season is felt across key data. A monthly survey conducted by the National Association of Home Builders (NAHB) revealed that the builder confidence index tumbled in September to 64 after the August figure was downwardly revised to 67 from the 68 initially recorded. Each of the index’s components were weaker, with building costs rising amid higher input costs and scarcer labor weighing heavily on sentiment. When accompanied by rising mortgage costs, other housing data may expose some cyclical weakness emerging in the figures as price growth slowly decelerates. Equities were unfazed by the developments, with Dow futures closing a new record high before climbing to a fresh intraday record of 22320 overnight.