Market News & Insights
21 August 2014

As the BoE breaks rank, FOMC split

EUR/USD 1.3267
GBP/USD 1.6574
GBP/EUR 1.2490 (0.8005)
EUR/CHF 1.2110
GBP/CHF 1.5126
GBP/AUD 1.7869

Last night we had surprise in the form of FOMC minutes from July’s meeting and a split amongst the members. Top U.S. central bankers said the nation’s labour market is improving faster than expected and believe it’s time to alter interest rates. A majority still don’t believe there’s been enough progress to consider altering interest rates soon. Some argued that a broad surge in hiring and a rising inflation rate means the Fed should start to lay the groundwork for raising interest rates perhaps a touch sooner than expected. The U.S. posted its best six-month stretch of hiring in the first half of 2014, and the unemployment rate recently fell to a six-year low of 6.1%. Inflation has also risen sharply in the first half of the year toward the Fed’s 2% target. Yet the majority insisted the labour market is still weaker than normal and that inflation poses little threat. They say the falling unemployment rate has exaggerated how quickly the labour market is improving. Many analysts feel that the FOMC minutes are telling us what happened three weeks ago and Jackson Hole has taken an elevated status of more than just an academic conference, given its precedent for signalling meaningful policy shifts. The Jackson Hole annual economic conference begins today and is a chance for or central bankers, finance ministers and academics to talk about the world economy in a public but informal setting. Friday’s speeches though will be monitored closely as both Yellen and ECB’s Mario Draghi are due to speak and may provide further details around monetary policy.

In terms of currency movements last night’s comments still pushed EUR/USD to year lows and levels not seen since September 2013. The cross is currently trading under 1.33 and looking at testing lower. It also pushed GBP/USD to pre summer levels under 1.66.

Yesterday’s MPC minutes release offered us the first split on the benchmark rate in more than three years as Martin Weale and Ian McCafferty wanted to raise it by 25 basis points from a record-low 0.5 percent, according to the minutes of the Monetary Policy Committee’s Aug. 6-7 meeting. The remaining seven members, including Carney, opted for no change, saying early tightening could leave the economy “vulnerable to shocks” and jeopardize indebted households. In their analysis, Weale and McCafferty said economic circumstances “were sufficient to justify an immediate rise in bank rate” and the MPC needed to move in advance of potential labour market pressure. They also said that even after a 25 basis-point increase, policy would remain “extremely supportive” of further hikes. It pushed EUR/GBP back under the .80 threshold but was hovering back around that level again this morning.

Looking ahead today in Europe we have French Manufacturing and services PMI and Flash services Manufacturing & Services PMI. In the UK we have retail sales out attend stateside we see employment claims released at 1.30 this afternoon. All eyes though will be focused on Jacksons Hole and any speeches made by central bankers, with the main focus on Yellens speech tomorrow at 3pm GMT.