Currency Focus
USD - CPI suggest that inflationary pressures wont evaporate quickly and that the Fed will retain a tightening bias. The higher than expected inflation readings are likely to rekindle fears that the Fed is not done tightening yet. Perhaps most troubling is that the core year-over-year CPI remains well above the Fed's target zone at 2.7%, suggesting that inflation might not recede rapidly enough and prompt another Fed hike. The Fed will be vigilant in the face of rising inflation.
GBP - Overall, the minutes reinforce our view that the MPC will wait until April or May before acting again, unless there are some particularly worrying wage developments or evidence mounts that companies and retailers are increasingly trying to push through price hikes.
The minutes reinforced the impression from the Bank of England Inflation Report (released last week) that the MPC is quite worried that CPI inflation could fall quite sharply and quite rapidly later in the year. There seems to be no desire to send a hawkish message on interest rates unless there is a sharp uptick in wages and the market has taken comfort from that.
The 7-2 MPC vote to hold UK rates steady in February reveals that the Bank of England's tightening bias remains intact. There is a definite schism within the MPC right now. The doves are looking to lower inflation risks later this year but they are bound to be outweighed by the hawks' fears about the bad precedent being set by inflation at 2.7%. The market should stay on amber alert to the risk of another quick, pre-emptive hike next month. Even though the UK interest rate and debt markets have gleaned a little short term optimism out of the minutes, we think there is nothing to be buoyed up by. The lean towards higher rates remains in force.
JPY - The JPY strengthened a little when the decision was announced, but this only lasted a couple of minutes, with the market quickly focussing on the BoJ assurance that further tightening would be gradual. Indeed, it is almost certainly the case that no more rate hikes will be considered until Q3 and this will leave the JPY as a low-yielding currency without any support from rate hike speculation.
AUD - RBA Governor Stevens stated that they are more comfortable with the inflation outlook now than back in November, although risks still are screwed to the upside.
GBP - Overall, the minutes reinforce our view that the MPC will wait until April or May before acting again, unless there are some particularly worrying wage developments or evidence mounts that companies and retailers are increasingly trying to push through price hikes.
The minutes reinforced the impression from the Bank of England Inflation Report (released last week) that the MPC is quite worried that CPI inflation could fall quite sharply and quite rapidly later in the year. There seems to be no desire to send a hawkish message on interest rates unless there is a sharp uptick in wages and the market has taken comfort from that.
The 7-2 MPC vote to hold UK rates steady in February reveals that the Bank of England's tightening bias remains intact. There is a definite schism within the MPC right now. The doves are looking to lower inflation risks later this year but they are bound to be outweighed by the hawks' fears about the bad precedent being set by inflation at 2.7%. The market should stay on amber alert to the risk of another quick, pre-emptive hike next month. Even though the UK interest rate and debt markets have gleaned a little short term optimism out of the minutes, we think there is nothing to be buoyed up by. The lean towards higher rates remains in force.
JPY - The JPY strengthened a little when the decision was announced, but this only lasted a couple of minutes, with the market quickly focussing on the BoJ assurance that further tightening would be gradual. Indeed, it is almost certainly the case that no more rate hikes will be considered until Q3 and this will leave the JPY as a low-yielding currency without any support from rate hike speculation.
AUD - RBA Governor Stevens stated that they are more comfortable with the inflation outlook now than back in November, although risks still are screwed to the upside.
posted by Naveen Pantera at 12:44 PM
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