It was an eerily calm European session on Tuesday, as the US dollar digested some of its recent gains and the pound managed to pause its slide.
The US dollar had been strong overnight after a research paper from the San Francisco Federal Reserve indicated that the market and the public could be underestimating the Fed’s future interest rate hikes – both in size and their timing. This helped the dollar to climb to its highest in 6 years against the yen and the euro to slide to a 14-month low against the greenback.
The UK currency was also at a 10-month low against the dollar, after a new poll that showed Scotland’s pro-independence vote catching up with the camp against independence. During the actual session, sterling was helped by industrial output for July, which came in at 0.5% month-on-month, significantly surpassing expectations of a 0.2% gain.
In a speech to representatives of trade unions, Bank of England Governor Mark Carney said that if interest rates start to rise in accordance with market expectations in the spring of 2015, the Bank of England would achieve its inflation of objective of 2% in 3 years’ time. This was a kind of endorsement of the interest rate increases expected by the market. This of course also greatly reduces the chances of an early interest rate hike in 2014, which is sterling negative, but the Governor probably also wanted to convey a message of stability and policy continuation given the uncertainty caused by the Scottish referendum.
Carney also emphasized the importance he attached to wage earnings growth as a guide for future monetary policy decisions and that the level of wages could also indicate the degree of slack in the labor market.
As a result of Carney and the industrial output report, sterling managed to eke a gain and get close to the 1.61 level against the dollar at 1.6095.
Tomorrow is expected to be a quiet day in terms of economic releases.