Good morning

The Governor of the BOE came out fighting yesterday by “tempering” speculation as to when the UK base rate is likely to rise. After the euphoria at last weeks meeting that rates will have to rise sooner rather than later, Gov. Carney has now sent the Economists and Traders back to their think tanks wondering when this is now likely to happen.

Gov Carney told the Treasury Select Committee that there is some additional spare capacity in the UK labour market that can be absorbed before the need for the base rate to be hiked. He further stated that the timing of the hike is not as important as the fact that any increase in the interest rate will be limited and gradual.

As expected the FX market reacted badly with the GBP/USD falling from 1.7025 to 1.6970, while EUR/GBP weakened from 0.7992 to 0.8025. While many of us will view this as a temporary “glitch” it is still quite significant because for now the “wind has been taken out the sails”. I have no doubt the market was heavily LONG GBP (vs USD and EUR) and the comments caused the traders and the market in general to cut their positions until new information or rumours surface. It would appear that for now there is probably more to come (GBP weakness) before support levels are reached and the market decides these are good levels to re-instate LONG GBP positions.

US GDP numbers to be published at 1.30pm (UK time). Previous was -1.00% and the consensus is for the latest number to come in around -1.70%. So going back to Fed’s Yellen’s comments last week, you can see there are still issues to be resolved before they are in a position to hiking rates. As I have mentioned on a number of occasions, the timing of any rate hike is monumentally important because a hike when the economy is not ready will destroy all the years of good work that has been done (Look to the ECB and their decision making experience).

FX Volatility pretty much unchanged with the options market continuing to see sideways trading over the coming months and thus happy to remain sellers of volatility and earn decay/theta/premium. 1m EUR 4.60/4.80, 1m GBP 4.50/4.80. 1m JPY 4.80/5.20, 1m EUR/GBP 4.55/4.75 all trading near their all time lows. Once again the CB’s have managed to take the spark out the FX market and with it the ability to “manage” their currencies better. Make no mistake, whether it is verbal or actual intervention, CB’s indeed have a very good handle (generally) over the direction their currencies are heading.

Yesterday also saw the German IFO (German Business Confidence) numbers published. 109.70 vs 110.40 (previous) pointing to a slower expansion of manufacturing output and order volume.  This should weigh on the EUR especially as the German economy is the strongest amongst EUR members.  Then again what should happen and what actually happens is very different as we can see by the price action in the EUR/USD. After the number was published, spot fell 10 pips and recovered almost as quickly.

Oil prices, which have remained quite stable in recent years have started to move higher in response to the situation in Iraq. This is likely to result in a phase of higher long term prices and increased volatility. In turn this could result in increased inflation as countries who are net importers of oil are likely to suffer as a result of the shift. Once again the world is being drawn into the religious differences in the M.E. If only Nelson Mandela was still alive and able to help. The greatest statesman I am sure could have helped.

Have a good day ahead