Dollar marches higher but UK interest rate policy set to return to focus

Today’s macro highlights:

  • GBP - Mark Carney meets Treasury Select Committee
  • GBP - Public Sector Borrowing

Dollar marches higher but UK interest rate policy set to return to focus

The lack of economic data yesterday exposed some unusual market traits. US treasury yields slipped back from recent high, eroding the dollar index and pushing EUR/USD higher as a result. This move is being seen as a technical correction in the market, offered the pair its first day of gains in over a week and could well prove temporary amidst growing concern as to what will happen next in Italy. With the populist coalition closing in on taking power, the proposed additional welfare spending, roll back of pension reform and billions of Euros worth of tax cuts could certainly place a strain on Italy’s relationship with Brussels.

The Pound remained under pressure during yesterday’s session with cable again posting fresh lows for the year. However, today’s economic agenda sees Mark Carney and fellow Monetary Policy Committee members being quizzed by the Treasury Select Committee of MPs, starting at 9.15am BST. Interest rate policy will be at the top of the agenda here, with the potential to see the committee chastising the Bank over yet more unreliable guidance. It’s sensible to expect that the words will be very well chosen, but with the Pound at depressed levels, anything that signals more clearly a rate hike in August has the potential to give the currency at least a temporary boost from these levels.

The UK economy will remain in focus with Public Sector borrowing data due for release at 9.30am BST. Although a repeat of last month’s stellar reading certainly isn’t anticipated - bad weather in Q1 slowed the UK economy and in turn will be weighing on tax receipts - the market will be keen to see an improvement on the figure from a year ago. Anything close to or below this could well be taken as a negative for the Pound - although Mr Carney’s words in front of politicians may well account for more. Sterling could see a volatile morning.

Across the Atlantic, expect those dollar yields to remain very much in focus. 10 year treasuries still offer above 3%, but with fears of a trade war continually being dialled back, investors may well be inclined to throw support behind equities rather than debt. That’s not to say the dollar won’t fall from favour - the aggressive interest rate policy still offers some allure here - but as we saw yesterday with the technical correction that rather bizarrely lent support to the Euro over the greenback, there are clearly some who feel the dollar is overvalued now.

GBP/USD
Cable dipped below 1.34 for the first time since December during yesterday’s session, coming close to marking a 10 cent sell-off from last month’s highs. With UK interest rate policy back in the spotlight, we could see some improvement here, but as always this is going to be data dependent. That combination of tax receipts plus BoE testimony will give the markets plenty to be chewing over today - we likely need both to impress if sustainable gains are to be found.

EUR/USD
The pair printed a fresh six month low yesterday morning before making a technical correction driven by falling US dollar yields. However, against the backdrop of uncertainty that is the current Italian political situation, the downward trend here seems likely to resume. A move back to the early November lows sub-1.17 could well follow.  

GBP/EUR
Despite yesterday’s notable bout of selling on the pair, consolidation in the short term would leave the up-trend in-tact. We do however need to see some divergence here in terms of economic performance if there is to be a meaningful break higher. Certainly any suggestion that the UK’s lacklustre start to the year is temporary will have the potential to propel the pair towards fresh 12 month highs beyond 1.16.

Did you know….

Until 1997, it wasn’t the Bank of England calling the shots when it came to setting interest rates - instead, the Treasury took the lead. However, days after Tony Blair’s New Labour came to power just over 20 years ago, the Bank was given independence over monetary policy - at least to an extent, anyway. The Chancellor of the Exchequer is responsible for setting a target inflation rate for the Bank to achieve - currently this is 2%. If the target is missed by more than 1 percentage point either way, the BoE Governor has to write to the Treasury and explain why. The Treasury and the Chancellor also influence appointments to the MPC, whilst the Governor and Deputy Governor of the Bank are appointed by The Crown, under the advice of the Chancellor and the Prime Minister. So whilst the Bank of England was given independence, the government can still exert influence here.