The pound rose more than 0.45 percent against most major currencies during yesterday’s trading as a member of the Bank of England’s rate setting committee, Gertjan Vlieghe painted an upbeat picture of the UK economy and suggested an early interest rate hike is possible if there is a smooth return of the workforce from furlough.
In a speech to the University of Bath, Vlieghe said that he expects the first rate rise to occur well into next year as unemployment levels may rise in the short-term when the government’s furlough scheme comes to an end.
However, there is an upside risk and “should the transition out of the furlough happen more smoothly, with the unemployment rate at or below current levels by the end of the year, with associated signs of upward inflation and wage pressure beyond the temporary and base effects, then a somewhat earlier rise in Bank rate would be appropriate.”
Vlieghe will leave the bank’s Monetary Policy Committee in August so his comments could be looked over, but Vileghe has always been a dovish member of the MPC so his hawkish tone has caught the eye of investors.
Whilst the pound rallied on the back of Vlieghe’s comments, the pound is still trading within a narrow range, and has struggled to recapture the form of previous months. Unfortunately for the pound, the virus is still weighing on the currency.
The Indian variant is now a concern, not only in the UK, but in Europe and France has now joined Germany in setting a quarantine period for arrivals from the UK. Boris Johnson is promising to reopen in June but cabinet ministers including Matt Hancock appear less than confident about returning the UK to a more normal way of living in the coming weeks.
In Europe, the mood has improved significantly, and recent data shows a growing level of business and consumer confidence, which bodes well for the economic recovery.
However, as with many economies, inflation remains a concern, and whilst Europe sees rising inflation as a temporary problem, high inflation would place considerable pressure on the southern states that are heavily leveraged and would face problems if forced to borrow at higher interest rates.
The European Central Bank has been purchasing assets via its quantitative easing programme, which has meant states could borrow affordably and investors have remained comfortable, but a rise in interest rates could spook investors and cause them to shy away from Eurozone debt.
German and Italian bond yields rose last week as investors believed the ECB may be preparing to pare back their bond buying programme although bond yields soon fell when ECB president Christine Lagarde said it was too early to be tapering the stimulus package. The ECB will discuss and review their bond purchasing programme on the 10 June against an improved economic setting and outlook.
The US’ Federal Reserve has been printing $120bn per month but there have been hints the Fed could soon look to reduce this with Randal Quarles, a governor at the Fed, the latest to pass comment.
Quarles said it may be appropriate to start a discussion at one of the upcoming meetings, which echoes a similar tone to the recent Fed minutes. This rhetoric has supported the US dollar and a tapering of the current QE programme could strengthen the US dollar.
Annualised inflation is now running at 4.2 percent, as reported last week, although this is unlikely to concern Fed Chair Jay Powell who is keen to achieve a longer term average of 2 percent and with inflation having fallen short by 5 percent since 2007, the current level can be accommodated, although inflation is expected to fall in the coming months in any case.
The surge in inflation can largely be attributed a sharp rebound from depressed levels and temporary shortages in raw materials that has caused costs to spiral upwards. Neither of which are expected to be damaging long-term.
With so little in the way of significant events right now, month end flows in the run up to the long weekend will be notable today. Month end flows are the rebalancing of portfolios by fund managers that cause a move in the currency due to the fund manager rebalancing a long or short position in the FX markets.
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