While the major central banks are continuing to send mixed signals regarding their respective monetary policy guidance in the near-term outlook, one thing is becoming clear: emergency measures are slowly being eased. The Reserve Bank of New Zealand has announced it will end QE and Bank of Canada has already been tapering their asset purchases programmes. Could the Bank of England be the next major bank to reduce its monetary support?
Will the cable break 1.39 resistance?
The GBP/USD has held its own around the 1.3800 handle for several days now, but so far been unable to break resistance at 1.3900. Will it get a helping hand from further hawkish BoE remarks/dovish Fed commentary?
Source: ThinkMarkets and TradingView.com
UK economy growing strongly
The UK economy has been growing strongly in recent months as lockdown measures eased thanks to the rapid pace of vaccinations and previous lockdown helping to stem the spread of the virus. Although the delta variant has since been spreading rapidly, the UK government has decided that all legal limits on social contact will be removed for England from Monday. The re-opening of the economy has booted jobs, retail sales and activity in the services sector. Inflation has picked up sharply.
This morning saw UK labour market data mostly beat expectations as employment increased by 356k to 28.9 million in June, the biggest gain since the start of the pandemic. Jobless claims dropped by nearly 115K, much more than 32.5K expected. Average hourly earnings jumped to 7.3% in the three months to May compared to last year, surpassing 7.1% expected and 5.7% previously. Yesterday, headline CPI came in hotter than expected as it rose further above the Bank of England’s 2% target to 2.5% in June, beating expectations of 2.2% and the previous print of 2.1% recorded in May.
BoE’s Saunders delivers hawkish remarks
As a result of the improving UK data, the Bank of England is becoming increasingly vocal about tapering QE. Indeed, the pound shot higher this morning (before easing back slightly along with all the other dollar pairs) on the back of remarks by BoE’s Michael Saunders that it "may become appropriate fairly soon to withdraw some stimulus." Saunders said that would be appropriate so long as economic activity and inflation indicators remain in line with recent trends, and downside risks to growth and inflation do not rise significantly.
The hawkish comments from Saunders and those from Ramsden the day before have led to some speculation that the August MPC meeting could be a live one. However, I don’t think the BoE will move that soon to end asset purchases, but it could nevertheless prepare the market for tapering in the months ahead.
Fed Chair: further progress needed before tightening
Meanwhile, the big upsurge in inflation has surprised even the Fed, yet the US central bank continues to think price pressures will be temporary and that the economic recovery hasn't progressed enough to begin tapering. The markets have responded by buying bonds, causing their yields to drop. This morning, the 10-year Treasury yields were down again, falling to 1.316% at last check.
Fed Chair Powell will be testifying again today, so expect to hear more of the same dovish rhetoric. On Wednesday, he pushed back against the idea that the Fed was coming under pressure to act on inflation. According to Powell, the Fed’s other mandate – to promote maximum employment – has not been achieved as he says the labour market has a “long way to go”. Powell said that reaching the standard of "substantial further progress" is still a ways off, adding that they “will provide advance notice before announcing any decision to make changes to our purchases.”
Investors will be keeping a close eye on upcoming US jobless claims data, due for release at 13:30 BST. Claims are expected to have dropped to 350,000, with continuing claims falling to 3.3 million last week. We will also have the latest Empire Manufacturing, Philadelphia Fed Business Outlook and the Import Price Indices, as well as industrial and manufacturing production numbers today.
Meanwhile, we will also hear from Morgan Stanley, after other banks reported mostly positive earnings earlier in the week. Morgan Stanley is expected to report a $3.1 billion profit in the second quarter.
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