Carney hints at rate hike, EU’s Barnier fuels Brexit optimism

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29 September 2017


The Pound edged higher against both the Dollar and Euro on Thursday following some upbeat comments from the EU’s chief negotiator and another hint from Bank of England Governor Mark Carney that higher interest rates are on the horizon in the UK.

peaking at joint press conference with UK Brexit Secretary David Davis on Thursday, the European Union’s chief negotiator Michel Barnier fuelled optimism over the state of the Brexit negotiations. Barnier claimed that ‘considerable progress’ had been made on Britain’s talks with the EU, although large hurdles remain.

BoE Governor Carney also ramped up already sky high expectations that a first interest rate hike in a decade will take place in the UK this year. Carney warned that interest rates would rise in the “relatively near term” and that it was time for the bank to ease back on its very loose monetary policy. We think it is very clear that the Bank of England is gearing the market up for a move in rates before the year is out, most likely at its November meeting.

Carney had somewhat tempered gains for Sterling on Thursday at an event celebrating 20 years of monetary policy control, suggesting that the central bank could not be expected to nullify any potential damage to the economy from the Brexit process. Sterling traders now turn their attention to this morning’s updated GDP data for the second quarter, although this is expected to remain unrevised. Bank of England member’s Cunliffe, Broadbent and Governor Carney will all be speaking this afternoon at an event in Brussels.

US Dollar on course for best week so far this year

The US Dollar put itself on course for one of its best weekly performances so far in 2017 on Thursday with a robust set of GDP data fuelling optimism about the health of the US economy.

Growth for the three months to June was revised upwards to 3.1% from 3.0%, marking the fastest pace of growth in the world’s largest economies since the first quarter of 2015. Federal Reserve member Esther George also spoke yesterday, striking a fairly optimistic tone on the strength of the US recovery. George claimed that continued interest rate increases would be best to “keep economic growth on a sustainable path”. In our view, the latest data out of the US is pointing firmly to another interest rate hike by the Federal Reserve in December.

Eurozone business sentiment jumps, CPI data out today

A rebound in both business and industrial confidence in the Eurozone in September helped lift the Euro off around its lowest level in five weeks versus the greenback. The monthly business index increased unexpectedly to 1.34 from a revised 1.08, while the industrial confidence measure also jumped to 6.6 from 5.0, undaunted by the prospect of less economic stimulus from the ECB. This suggests consumer spending in Europe is likely to remain robust in the coming months following a bumper first half of the year that has seen growth in the Eurozone far exceed that of both the US and UK.

This morning’s Euro-wide inflation data has potential to be a significant market mover today, given its importance to the path of the European Central Bank’s monetary policy. Consensus is for a modest uptick in the headline measure to 1.6% from 1.5% which would provide further incentive for the ECB to announce a tapering of its QE programme at some point later in the year.