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Week In FX Europe – BoE To Judge Slack Before Hike

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The Bank of England rate announcement nearly got lost in the shuffle this week. Yesterday, Governor Carney and his fellow policy makers left both the benchmark rate at +0.5% and the overall size of its bond portfolio at £375b.

With the Fed trying to wind down its bond-buying stimulus, the ECB humming and hawing about implementing QE, Governor Carney at the BoE is expected to keep policy unchanged throughout the remainder of this year.

The UK economy is currently “basking in a spell of rapid growth and low inflation.” Earlier this week the IMF indicated that it expects the UK economy to expand +2.9% this year (less than the BoE’s forecasted rate of +3.4%), outpacing both Germany and US growth. Despite the dip in February’s inflation rate (+1.7% annualized), it is expected to hover close to the BoE’s +2% target throughout the year.

Governor Carney has been rather vocal and adamant that UK rates will remain low, keeping the BoE’s easy-monetary policy intact at least until employment improves further and when the nation’s economy is running to its full potential.

Like any G7 monetary authority, the timing of the first rate hike will be of the utmost importance. If authorities wait too long to tighten, inflation may take off. If they act too quickly, then economic recovery could quickly stall.

Fixed income traders are pricing in the BoE’s first-rate hike during Q1, 2015 – perhaps even six-months before the Fed and certainly much sooner than the ECB. No matter when authorities do decide to tighten, any rate rise is expected to be slow and limited to start.

A change in the BoE’s interest rate guidance last month (originally rates were to begin to tighten when unemployment hit +7%, currently hovering at +7.2%) emphasized that once the +7% has been passed authorities would keep a loose monetary policy at least until the “slack” in the labor market and broader economy has been reduced. To date, UK policy makers seem to have underestimated the “real” strength of the own country’s job market.

Expect going forward a hot debate in reference to the word “slack” – Carney thinks there is more “slack” in the labor market than the MPC’s best estimate.

WEEK AHEAD

* USD Advance Retail Sales
* GBP Core Consumer Price Index
* EUR German ZEW Survey
* USD Consumer Price Index
* NZD Consumer Prices Index
* CNY GDP YTD
* EUR Euro-Zone Consumer Price Index
* CAD Bank of Canada Rate Decision
* CAD Consumer Price Index

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell

@dean_forex

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