Sterling is facing a hard cold reality
The Bank of England will have no other option but to let the inflation run higher
Don't be fooled by the current sell-off in the gold price
European markets are extending their sell-off from yesterday and picking up the momentum where Asia left off. The Chinese industrial production number was poor and it triggered alarms about the health of the second biggest economy in the world. The fixed asset investment and retail sales data both failed to provide any support. Nonetheless, today is all about the Super Thursday and the BOE will deliver its decision on their monetary policy. US Futures are also trading lower despite some optimism around the US tax overhaul.
After a strong move, the Sterling is facing a hard cold reality. The surge in inflation which the UK’s economy is experiencing is not something that can make the Bank of England change its stance towards their monetary policy. The wage growth is embarrassing and increasing the interest rate under this environment (where consumers are largely feeling the pinch due to the higher prices) is not going to resolve the issue.
The Bank will have no other option but to let the inflation run higher than its current target and this is pretty much what we are expecting from the MPC minutes on Thursday. The monetary policy committee needs to overcome its divided view on the inflation which is only creating noise. It is Mark Carney’s (the governor of the Bank of England) job to send a clear message to the market which could ease off such anxieties.
The US PPI data released on Wednesday was soft, however traders took the number with a pinch of salt as the odds for another rate hike for this year are still at 40 percent. This is thanks to Paul Ryan’s (the speaker of the House of Representatives) comment who thinks that the tax overhaul plan could be released by the end of September.
This has given hopes to the dollar bulls as this tax overhaul could provide some of the tailwind for the US economy which many have been expected since the Trump’s inauguration. It appears that Washington is working more towards getting things done now rather than letting them high and dry.
Later today, we also have the US Core CPI and CPI m/m numbers due and the forecasts are at 0.2% and 0.3% respectively.
The precious metal is suffering from profit taking and the retracement continues. The fading geopolitical tensions are also weighing on the price and investors are using a calmer approach towards the risk on trade. Don't be fooled by the current sell-off in the gold price, the open interest (the higher number confirms a new fund flow) shows that the price would bounce. We maintain a year end target at 1400.