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Jamie Jemmeson
October 19, 2021

Market To Watch Bank Of England (BoE) Gov Bailey For Further Clues On Interest Rate Policy

Sterling Recovers from Lows but Waits for the Bank of England’s (BoE) Gov Bailey’s comments

Sterling continued to nudge higher as concerns surrounding Brexit tension continue to ease whilst yields continue to rise as expectations for a rate hike accelerate. The probability for a rate hike at November’s meeting has risen from 5.9% a month ago to 32%, whilst a December hike is priced at 70% probability. However, it may not be as clear cut as cautious testimonies from two BoE figures last week highlights the potential diversion. The ebbs and flows of Sterling’s range is circulating around the positive impact against inflation that raising could have but also the detrimental effects on growth metrics.

Looking to the day ahead the focus will be on comments from BoE Governor Bailey who is due to deliver welcoming remarks at an online conference on climate change; jointly hosted by the BoE and Bank of Italy. Over the weekend Bailey commented that the MPC will “have to act” to curb inflation, adding further fuel to the speculation.

Dollar Weakens As Focus Turns To Monetary Policy

The Dollar weakened against a basket of major currencies on Monday following a light macroeconomic calendar and on the view that central banks will begin tightening earlier and faster than previously expected.

The Dollar index fell as disappointing US factory data weighed in heavily. Activity was hampered by supply chain issues and overall activity on the month was also dragged lower by declines in mining and utility output.

On Wednesday the Federal Reserve (Fed) will release its beige book update on the current state of the economy. Investors will be looking to confirm expectations around the timing of the first US interest rate hike since the pandemic. Data last week showed that consumer prices increased above five percent year-on-year for the fourth month in a row, with minutes from the most recent Fed meeting indicating the central bank may begin tapering their $120bln a month bond-buying program in November.

Polexit Raises Political Tensions In The EU

Tensions continue to mount between Poland and the EU following comments made by Poland’s Prime Minister Mateusz Morawiecki in a letter of EU leaders yesterday. He accused the EU of using financial blackmail over fears surrounding “Polexit”, suggesting the bloc is withholding £48 billion of the COVID-19 recovery fund in an attempt to punish and starve Poland. He made further comments that the bloc risks collapse or becoming a dictatorship if it continues to withhold financial support. The Polish PM is due to address the European Parliament today with EU leaders discussing the matter further at the Brussels summit this week. Further escalations could weigh down on the Euro.

The Eurozone money market curve has steepened over the last week with markets now pricing in a 30-basis point tightening policy adjustment over the next 24 months. We are due to hear from several European Central Bank (ECB) speakers today which could provide further clarity on future policy changes.

Looking ahead at today and it is another very quiet day for Eurozone data. We do have Construction Output month-on-month and year-on-year but neither reading is expected to provide much direction for the Euro.

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