The pound hit an 8-month low against the euro yesterday after Ben Broadbent, Deputy Governor of the Bank of England failed to address changes to the bank’s monetary policy in his speech.
Speaking at the Scottish Council for Development and Industry, Broadbent placed emphasis on the consequences of reduced trade for the EU and British economies after Brexit - which prompted markets to believe he sees no pressing need to raise interest rates.
Following the 5-3 split MPC vote as well as hawkish comments made by governor Mark Carney and chief economist Andy Haldane in recent weeks, expectations have grown for policy tightening by the Bank of England in order to address the inflationary pressure brought on by the weaker pound since Brexit.
The pound was further hit by a report published yesterday by business lobby CBI and consultancy firm PwC which suggested a possible decline in optimism in Britain’s overall business climate, with financial services firms particularly pessimistic.
The report follows a string of poor data showing signs of weakness in the British economy. Economists suggest the gloomy sentiment reflects a mix of uncertainty caused by Brexit as well as the possibility of tightening financial conditions. With Brexit negotiations currently underway, there is fear that many banks are planning to migrate business from the UK into the economic bloc.
The dollar strengthened against JPY yesterday as investors await Yellens comments in today’s semi-annual testimony to US congress on monetary policy. Markets are expecting Yellen to indicate that the Fed is on course to raise interest rates for the third time this year.
At its June meeting, the Fed hiked rates and stuck to its forecast of one more hike this year. The strong US jobs report published on Friday has eased concerns over whether officials would deviate from the planned tightening path.
In addition, Fed member John Williams advocated the case for another US rate hike this year. Williams also outlined that he expects the Fed to unwind its massive balance sheet in the coming months.
Speaking at an economics event in Sydney yesterday, the San Francisco Fed president said he believed inflationary pressures in the US economy are likely to pick up over the coming year.
09:30 – GBP – Average Earnings Index 3m/y; Forecast at 1.8% against a previous of 2.1%
15:00 - USD - Fed Chair Yellen Testifies to US congress
15:30 - USD - Crude Oil Inventories