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Treasury Select Committee Provides Sterling with a Boost

The Sterling received a welcome boost yesterday as comments from the Treasury Select Committee revealed some wider thoughts of central banks and their approach to monetary policy. Bank of England (BoE) Governor Bailey stated that he is very uneasy about the inflation situation and that all meetings are live for any potential rate hike. He went on to comment about the November decision, stating that it was a close call and that the real puzzle is what will happen in the labour market. In the meantime, Chief Economist Pill highlighted that there were risks in leaving tightening too late, but also caveated this by stipulating the risks of going too early. Finally, Monetary Policy Committee (MPC) member Saunders reiterated his call for an immediate rate hike. In short, the tone of the Treasury Select Committee was hawkish and highlighted the strong probability of a hike next month.

This morning the UK labour data was released and showed a rise of 247k in employment in the 3 months to September, while the unemployment rate fell to 4.3% from 4.5%. Meanwhile, annual salary growth slowed to 5.8% from 7.2%. Data is still so distorted by the effects of the pandemic that it is still hard to gauge underlying pay conditions. Most of the reports covered the period before the government’s furlough scheme expired. The next report, which will be released just before the BoE’s December monetary policy update, will provide more evidence on the first impacts of the end of the scheme.

US Dollar Trades Near 16-Month High Levels against a Weaker Euro

The US Dollar continued to strengthen against a weaker Euro on Monday. The US Dollar Index traded above 95.60 as the European Central bank (ECB) pushed back against tightening monetary policy amid global inflation pressures. The current rate of inflation has led some former US Federal Reserve (Fed) policymakers to call for an early tightening of monetary policy in response to growing inflationary pressures. However, two of the current Federal Open Market Committee (FOMC) members have urged patience in response to rapidly increasing headline inflation rates.

Following yesterday’s (better than expected) Empire State Manufacturing numbers, the market will await October’s Retail Sales Data which is due this afternoon. Consensus forecasts are expecting an increase of 1.1%. Consumer spending figures will also place further pressure on the Fed to bring forward their expectations for rate hikes and the pace of tapering.

Looking ahead to the remainder of the week, we have several Fed speakers due to speak. Market attention will turn to comments from the most ‘hawkish’ member within the FOMC, James Bullard, who will speak in a television interview today. 

Single Currency Weakens on Dovish Commentary

The single currency weakened yesterday following comments from ECB President Lagarde. She reiterated that the conditions for raising interest rates were unlikely to be met in 2022. Lagarde added that tightening monetary policy now to temper high inflation would hurt the recovery and take effect just at the point when inflation was coming down. Lagarde highlighted that such a move would do more harm than good. She added that it was better to nurture the recovery through favourable financing conditions. Looking to the day ahead, Q3’s Gross Domestic Product (GDP) growth is a second reading that is not expected to be revised from the initial increase of 2.2%. However, the report will give more detail on the drivers of growth. The Q3 employment report will show how many jobs were created during the quarter.

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