Major Overnight Headlines
• Obama to name Summers as next Fed boss, Nikkei
• UK July construction output up 2.2% MoM versus 2.1% rise expected; previous -0.7% rate revised to -1.1%
• Japan’s Abe says sales tax decision to come in “early October”, Bloomberg
• New Norges Bank data suggest current CPI rate is inconsistent with degree of labour market “slack”
The first-half of the London session was incredibly boring, although at least two themes stood out: 1) GBP firmness and 2) the EUR still appears soft on a number of the cross rates.
There is probably still an open window to profit from a bit more GBP upside in the run-up to next week’s August CPI report due on the 17th, particularly as there will be enough time afterwards to square-up in front of the FOMC statement which isn’t due until the following day. That’s what we might in FX call a “green light”. We think the trade-weighted GBP is unlikely to move much lower from here in the run-up to the data, leaving significant upside even below 0.84500 in EUR/GBP very difficult to secure. If nothing else, the current range and price action in the pair symbolise roughly where the perceived balance of risks is heading into next week.
Staying with this theme, we’ve written before that the BoE has been doing “its best” to keep rates anchored and the GBP weak. Admittedly, there is a small element of truth in the idea that financial market participants have “gone to war” with the Bank of England: the risk or probability of there being too much stimulus already in the system for the “knockouts” to be hit sooner than the Bank anticipates is certainly not “zero”. Still, a lot of what the media have done with the idea that someone has drawn a “battle line” between market participants and the Bank is based purely on “hype”. What is rather likely is that what many believe is an ensuing war between markets and the BoE is nothing more than a failure of the market to “price in” the existence of a new macroprudential toolkit into the curve and the GBP. The BoE no longer has to resort purely to interest rate hikes in order to affect the way in which the financial sector interacts with the real economy; and the Bank has been telling us this over, and over, and over, and over again.
However, a much higher CPI reading next week will in our opinion strengthen the case of those who believe that the Bank has got its forecasts wrong, and leave open the possibility that the Bank has already resorted to allowing the GBP and rates to exert a degree of tightening on the economy so that the knock-outs aren’t hit too early. Talk about setting policy in “real time”.
Read the full report: FX Daily
BMO