20/05 – Hot days, quiet markets

GBP: Sterling to focus on BOE thoughts
EUR: Single currency still helped by debt plan
USD: Powell refuses to be drawn on spending

Sterling

Inflation data released this morning confirmed that rising prices are not an issue the UK consumer is going to have to look out for in the coming months. With headline consumer inflation at 0.8% and producer price inflation – simply price rises at the beginning of a supply chain – falling 5.1% in April alone courtesy of the recent declines in oil prices, we are more likely to hear concerns about deflation from central bankers.

As we have noted in the past, you need to have demand to create inflation and, for now, there is little demand. Some will return as employees earnings recover and more businesses reopen allowing consumers to spend more on different sectors but, similar to the pace of the economy reopening, is likely to be slow.

Sterling has barely reacted and will likely focus on the testimony of Bank of England Governor Bailey and three other of his Monetary Policy Committee this afternoon to the Treasury Select Committee. This low inflation reading will invite questions as to whether the UK needs to follow Japan, Sweden, and the Eurozone in cutting interest rates to below 0%.

Further calls for negative rates would likely restart a weakening of the pound.

Euro

The single currency continues to trade higher as markets buy into the optimism provided by the draft bailout plan tabled by both France and Germany to mutualise a level of debt. We are yet to hear much from those countries who would likely be intrinsically opposed to such a plan; the viciousness with which they wish to torpedo such a plan, will govern the EUR moving forward. There’s very little idea about when that could happen but we cannot see the Dutch, Finns or Austrians staying quiet for much longer.

US Dollar

Little new news came from the testimony of Fed Chair Jerome Powell or Treasury Secretary Mnuchin to the Senate Banking Committee yesterday. Powell would not be drawn on fiscal policy despite previous comments calling for a continuation of broad government spending.

Today’s Fed minutes will be closely watched to see we whether members of the FOMC feel the need to add any conditionality to the current bond-buying plans. We think that those looking for such changes will be disappointed however, with the Fed very happy to keep the money printers spinning.

Elsewhere

The Kiwi dollar has risen overnight following comments from Reserve Bank of New Zealand Governor Orr that negative interest rates are still some way off.   “We don’t want to go negative at this point; we’re prepared to if we have to but not until a lot later… It’s got to jump the hurdles. It’s got to be seen to be necessary. It’s got to be seen to be effective, efficient and operationally capable.”

NZD is 0.4% higher this morning.

Have a great day, and please take care.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.