First Words From Fresh Face
Yesterday heralded the first public comments by new Bank Of England member Gertjan Vlieghe who was quickly branded a dove for his “wait and see” remarks regarding the Bank`s approach to an interest rate increase.
Speaking after the latest UK inflation data showed that the UK had once again dipped into deflationary territory printing -0.1% on the month, the new policy-maker stated that he felt risks to inflation are “probably skewed to the downside” and cited his concerns as “global growth continues to disappoint” which he labelled a “major risk”.
The latest inflation figures come just one week after the Bank Of England revised their inflation forecast, now anticipating that inflation will remain below 1% until spring 2016. Bank Of England member McCafferty, also speaking yesterday, stated he still sees “downside risks to inflation as transitory” tough eh does how see great uncertainty surrounding the level of slack in the UK economy.
Employment Data Boost
Employment data released today saw the unemployment rate fall to 5.4% from the previous 5.5%, marking a return to levels not seen since 2008 ,whilst average weekly earnings came in 3% vs 3.1% expected and 2.8% (ex bonus) vs 3% expected and though slightly lower than expected, the 3.0% average weekly earnings presents a further increase from last month`s 2.9% reading showing continued momentum in earnings growth.
BOE On Hold, But For How Long?
This latest dip back into negative inflation has confirmed the view of many analysts that the BOE will not be raising rates until later in 2016 with more players now adopting a similar view point.
However, whilst inflation is currently battling it our around 0%, with aggressive price discounting in some retail sectors and lower fuel prices to blame, the continued rise in earnings growth shows that momentum is building and with wages being the main cost for the majority of service-sector businesses, we could start to see upward price pressure materialising with slack diminishing as the unemployment rate once again falls.
Many players feel that in the absence of a Fed lift-off the BOE will remain on hold but BOE Governor Mark Carney himself commented recently that a UK rate hike is not dependent on Fed timing. With market pricing skewed toward the later half of 2016 this leaves clear upside risk that the BOE will in-fact move before then.
If oil prices do manage to sustain a further rebound from current levels, the increased energy prices alongside stronger wage growth should support a faster recovery in inflation bringing the option forward for the BOE.
Looking Ahead: Trade Ideas
A subsequent recovery in oil and commodity prices, which would support a medium term recovery in UK inflation, would also support near term recover in the Australian Dollar likely bringing the GBPAUD bull-trend correction into some very interesting territory.
A retracement into the February 2015 high at around the 2.00 mark, with the 50% retracement from September 2014 low sitting just below alongside support from the rising bullish trendline, presents an area where I would monitor market reaction to look to set longs targeting a return back up through highs.
This trade is likely to set-up around the end of the year/early 2016 around which time the issue of a UK rate rise “will come into sharper relief” in the words of Mark Carney. If inflation is picking up by this time the shift toward a repricing of UK rate hike expectations should support this idea.