The Dow index touched the level of 22K thanks to the dollar weakness
BOE under constant pressure to change its monetary policy
The softness in the dollar and rally in the US stock market is something which cannot be overlooked. Traders do know that the key reason for the dollar weakness is largely due to the fact that there may be no more rate hikes for this reason. However, the question which puzzles many is why is the dollar weak when the Fed has already increased the interest rate so many times this year? The answer is simply because the market expectations were utterly out of whack. It was anticipated that the Fed would be hawkish with respect to their monetary policy despite the fact that it was clearly communicated that the interest rate hikes would be gradual.
A non-voting member of the Federal Reserve, St Louis Fed Chief James Bullard’s comment further ruined the confidence for the bulls when he said he opposed any further rate hikes for this year as that would hinder the Fed’s inflation target of 2 percent. If he is the only one with that mind frame or if he has other pals who think the same, would matter a lot for the dollar index.
A meagre jobs number tomorrow could put the final nail in the coffin for any rate hike for this year. Therefore, the importance of this economic reading cannot be undermined. The wage growth would also provide another signal if the job conditions have improved or not.
While the decline in the dollar has pushed the Dow Jones index to reach another record high of 22K, the strength in the euro is creating major headwinds for the Dax index. The index is feeling the heat, and the CAC 40 has also given away all its gain since Macron’s victory.
Back in the UK, it has been a very long time since the Bank of England has increased its interest rate. The last surprise from the BOE was in 2016 when it lowered its interest to ward off Brexit woes. With Brexit looming, it is highly likely that the BOE will let the economy run hot rather than risking all their hard work by increasing the interest rate. The pound was trading near 1.33 before the BOE cut the interest rate and surprised the market which pushed the Sterling dollar price to 1.19. The selloff in the Sterling increased the pressure on the consumer income and their spending.
In today’s decision, there is enough rift among policy members who would like to reverse the bank’s decision which it made last year. But what the members cannot ignore is that the UK’s economy is slowing down and the construction numbers released yesterday were miserable and the services data has also displayed a much softer side.
Later today, we have the services PMI number due and an improvement is expected. What can support the case for a hawkish outcome today is an improvement in the wages and strength in the Sterling. So it would be important how the bank would manage the expectations, especially its growth forecast which is lowered by the IMF to 1.7%. We expect the bank to lower its growth forecast as well, and if it does that, the chances for a rate hike are pushed further away. If the growth forecast is changed then the inflation forecast would also have an equal importance in the bank’s view.
