Will Brexit deal pave way for BoE rate hike?

​​​​​​Today's news headlines:

  • 'Everything must go right for Mark Carney to raise interest rates’. The UK economy is running out of surplus capacity which will likely result in inflationary pressure. Despite this hawkish message, the Pound barely reacted. The aim of Mark Carney’s comments is more likely suggesting a quick shift to tighter monetary policy if a hard Brexit can be avoided. (Daily Telegraph)
  • 'Dollar gets yield support into payrolls test’. This week’s Federal Reserve meeting left the market trimming its expectations of a rate cut, driving US Treasury yields higher and strengthening the currency. However, weaker-than-expected wage growth data today may reverse this shift in sentiment. (Reuters)

UK inflation risk

Mark Carney may have been trying to communicate a hawkish bias in yesterday’s Monetary Policy Committee (MPC) meeting, but the market doesn’t seem to be biting. Brexit uncertainty still dominates, despite hopes for a resolution to cross-party talks by the middle of next week. However, with the UK economy running out of surplus capacity, inflationary pressures will start to build, especially if a no-deal Brexit can be avoided.

US wage growth

The Federal Reserve held steady on its monetary policy course earlier this week. Today’s Non-Farm Payrolls are unlikely to provide any cause for concern, but the focus will instead be on wage growth. Any suggestion that paycheques are growing too fast could justify the Fed’s more hawkish stance and relieve political pressure from the executive.

GBP/USD

Yesterday’s Bank of England (BoE) statement resulted in some volatility, but the Pound has been trading sideways against the US dollar since the Federal Open Market Committee (FOMC) meeting on Wednesday. US wage data today or Brexit developments next week both have the potential to provide meaningful direction.

EUR/USD

The Euro continues to retreat from the one-week highs tested just ahead of the FOMC statement. The Eurozone economy is still a cause for concern, so downside pressures have the potential to prevail for a while longer yet.

GBP/EUR

Brexit optimism and the prospect of further divergence of bond yields between the UK and Europe continues to deliver support to Sterling. The Pound is now closing in on one-month highs against the Euro and as long as the positive theme surrounding a Brexit compromise can be sustained, then further gains could follow.