BoE Stays Neutral – Will Fed Follow Suit?

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Market Drivers March 18, 2015

BOE remains on hold cites strong GBP
UK Wage data disappoints sends GBP below 1.4700
Nikkei .55% Europe -.25%
Oil $42/bbl
Gold $1145/oz.

Europe and Asia:
GBP UK Claimant count -31K vs. -30K
GBP UK wages 1.6% vs. 1.7%
EUR Trade Balance

North America:
CAD Wholesale Sales 8:30

USD FOMC 14:00

Cable tumbled in morning London dealing today after the latest labor market data revealed that wages grew slower than anticipated and Bank of England minutes suggested that the MPC was in no hurry to normalize rates.

UK labor data showed that claimant count improved as another -31K workers came off the rolls versus -30K expected and the unemployment rate edged lower to 5.7% from 5.8% initially forecast. However wage growth lagged expectations with average earnings rising only 1.8% versus 2.2% eyed suggesting that price pressures remain subdued.

In their minutes the MPC members voted 9-0 to keep rates unchanged noting that divergent monetary policies in Europe may put upward pressure on sterling. Although cable has fallen sharply against the greenback over the past month, it has actually soared to fresh multi-year highs against the euro. The BOE is clearly concerned about the deflationary aspects of such a move especially given the fact that UK does more trade with EU than US.

The MPC agreed that there was slightly more chance that the next policy move would be to increase rather than decrease rates but gave itself a wide window of three years to implement the plan and the market was clearly disappointed with their neutral approach to policy. Cable tumbled below the 1.4700 figure hitting a low of 1.4652 in mid morning London dealing.

The BoE is clearly concerned about the relative strength of the pound and their actions suggest that policy will remain accommodative for some time to come. The MPC decision may also foreshadow the FOMC statement later today. Although the US economy has been doing considerably better than the rest of the G-7 universe, the most recent data has shown deceleration. That coupled with dollar’s extraordinary strength over the past may give Fed pause with respect to tightening.

Although the Fed ostensibly does not deal with the exchange rate (that is the province of US Treasury) the members are keenly aware of the moves in the market and given the highly competitive global landscape are not likely to exacerbate the current slowdown in US activity by tightening the policy too soon.

Boris Schlossberg
Managing Director

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