The Pound on the Rise – UK Inflation and Carney in Focus

The Dollar saw red again through the Asian session today, with the Dollar Spot Index falling 0.33% to an intraday low of 100.08 ahead of the European open, the markets having little impetus to go in with the U.S administration continuing to hold back on any announcement on policies.

FOMC Voting member Evans spoke on Monday of his support for a 4^th rate hike, should inflation continue to pick up, but with Dollar weakness attributed more to the lack of catalyst from the Oval office than from the FED, the comments were largely brushed aside.

In stark contrast, the EUR has continued to find support in recent weeks, the markets now beginning to view the ECB’s monetary policy easing cycle coming to an end, with the prospects of a rate hike now being considered as inflationary pressures persist.

We will need to wait until next week for prelim March inflation figures out of the Eurozone, but with private sector PMI figures due out on Friday, the markets will certainly have a sense of whether inflation will continue to sit above the ECB’s target, which would certainly provide further upside for the EUR ahead of next week’s figures.

Draghi may have attributed inflation to rising oil prices, but the ECB will need to make a move in the interest of avoiding a more prolonged overshoot.

A lack of macroeconomic data out of the Eurozone today will continue to provide support for the EUR, with little to shift market sentiment towards ECB monetary policy through the European session.

From the UK, market sentiment towards inflationary pressures has also led to rising speculation that the BoE will need to begin to consider tightening monetary policy, despite the fact that inflationary pressures have built as a result of a slide in the pound.

News over the timing of Brexit has had limited impact on the pound this week, with the British government now scheduled to invoke Article 50 next, the markets likely to be more focused on February inflation figures out of the UK scheduled for release this morning, with Bank of England governor Carney also due to speak this morning.

Forecasts are for the annual rate of inflation to hit 2.1% in February and with Forbes having dissented in the last MPC, Carney’s comments this morning will certainly have an influence on the pound, Carney quite clear on his discomfort should inflation overshoot the BoE’s target for an extended length of time.

Inflation figures in line with forecasts or higher will be a positive for the pound, though the gains may be relatively muted ahead of Carney’s speech, the Governor’s outlook on inflation and monetary policy, together with any views on the UK economic outlook and the pound central to the market outlook on monetary policy in the months ahead, as the British government embarks on pulling Britain out of the UK.

We can expect plenty of noise from the Establishment and the British government on Brexit and the rhetoric has already begun, but when considering the issues the EU is currently facing with the U.S administration on renegotiating trade terms and with Marine Le Pen in the running to lead France, the EU may need to tread carefully, the U.S administration likely to take advantage of the EU’s position on Brexit.

The Dollar may find some support later in the day, with FOCM voting member Dudley scheduled to speak, though Dudley will need be supportive of a 4^th rate hike for the year. The gains will unlikely be meteoric with the Dollar having lost its vim of late, the markets looking towards the Oval office for the next catalyst in the Dollar.

At the time of the report, the Dollar Spot Index is down 0.39% at 100.02, with cable up 0.25% at 1.23891 and the EUR up 0.54% at 1.07971 against the Dollar, cable likely to see the bigger moves through the European session.