Discussion and Analysis by Charles Porter:
As markets open this morning, it is apparent that the value of the US Dollar was harmed by Janet Yellen’s remarks during a public conversation with Sir Mervyn King, former Bank of England Governor, last night. Speaking at the NYU Stern School of Business, Yellen painted an opaque picture of the US economy that undermined inflation and interest rate expectations. The picture across European equity and currency markets remains mixed, with similarly small movements within the Pound Sterling. Today, Phillip Hammond will deliver his Autumn Budget. The importance of fiscal expenditure within the domestic economy will mean that the budget is highly important for monetary policy and, thus, for the value of the Pound.
Sterling Briefing: Bailout Budget
Brexit stagnation, political scandal and vote of no confidence threats. The picture of the UK government has looked overwhelmingly bleak at times in the past month. However, May still remains, at least for now. The Prime Minister will be hoping that this afternoon’s Budget speech delivered to the House by the UK Chancellor, Phillip Hammond, will rally her cabinet and party; quashing the move for a vote of no confidence and bolstering her negotiating position vis-à-vis Europe.
Post-Brexit, the growth forecasts provided by the Bank of England and the Office for Budget Responsibility have been highly pessimistic. In order to stabilise the rate of economic growth, as measured by GDP, higher public spending may be imperative. Government spending is a component of GDP and thus can compensate for the feared downturn in consumption and investment. Supply-side spending will also support overall productivity, a significant concern within the current UK political economy.
Yesterday’s public finance data demonstrated above-consensus October borrowing, however, added to a picture of a sub-consensus deficit following Spring’s Budget. Looking ahead to the budget, May’s speech at the Manchester Conservative Party Conference should dictate a housing and supply-side focus. This kind of spending is less likely to spill over to the aggregate price level. However, should Hammond’s speech create positive or negative expectations of inflationary public spending and stimulus, expectations will converge on higher future interest rates, steepening the curve, and appreciating Sterling.
European Briefing: Banking Authority
Once thought to be a prized stake within Brexit negotiations, the fate of the European Banking Authority and larger European Medicines Agency, presently domiciled in London, has been decided. The former will be hosted in Paris, France, with the latter being relocated to Amsterdam, Netherlands. With a considerable populist momentum within the latter country, the decision to award Netherlands with the Agency, and its concomitant jobs, may appear to be somewhat ‘fool me twice’. Elsewhere in Europe, the Swedish Krona has been in tumult. It was shored up by central bank action yesterday, appreciating by around 1.2%.
Dollar Briefing: Hide and Seek
Speaking alongside the former governor of the Bank of England, Sir Mervyn King, the Federal Reserve Chair, Janet Yellen, downgraded the prospects of an interest rate hike when commenting upon all-illusive inflation. The US Dollar is trading down by around 0.25% against the Euro, and losing moderate ground to an uncertain Pound. Previous Federal Open Market Committee minutes have warned about low inflation, however, mildly shrugged it off as transitory, inviting the prospect of future hikes. However, last night Yellen warned “there may be something endemic here”. Markets internalized these comments, slightly pricing out the probability of a December hike, flattening the yield-curve and depressing the Dollar.
The Days Ahead
Hammonds Budget speech is scheduled for 12:30 BST this afternoon. It will undoubtedly be a critical component of the medium term UK economy and certainly today’s major FX event. Following disparate comments from Yellen last night, this evening will bring another opportunity to understand the composition of the US Federal Reserve when the FOMC release minutes from their last meeting at 19:00 BST. Elsewhere, we continue to look at the shocking depreciation in the Turkish Lira of ≈12% year-to-date; 2.2% week-so-far.