FX Mostly Quiet, Sterling And Dollar-Bloc Heavy

The week’s key events kick off today as the FOMC starts its two-day meeting.   Thursday features Scotland’s referendum, the ECB’s TLTRO and the SNB’s meeting.  Consolidative trading continues to be the dominant theme.  The dollar has been largely confined to yesterday’s trading ranges against the euro and yen, which themselves were mostly within the ranges set last Friday.  

Sterling is the weakest of the majors.  It has been turned back after being unable to close the upside gap (~$1.6283 according to Bloomberg), and is trading at four-day lows.  The polls suggest the Scotland contest is too close to call while money going into the bookmakers is said to be 3:1 in favor of the unionists (no).  The Commitment of Traders report from the CFTC showed speculative participants (non-commercials) buy sterling in size in the week through September 9, which covers a couple of days after the You Gov poll showed the nationalists (yes) ahead.   

Today the UK reported August inflation figures.  The 1.5% year-over-year pace was spot on expectations and compares with 1.6% in July.  UK inflation has been below the 2% target for eight consecutive months, the longest such streak since H1 05.  Food prices fell 1.1%, which helps account for the low headline number.  The core rate ticked up to 1.9% from 1.8%. 

Minutes from the recent MPC meeting will be released tomorrow.  There were two dissents in favor of immediate hikes in August, but they most likely did not gain any traction.  It is generally recognized that should Scotland vote for independence, the economic shock could delay the BOE rate hike that many see in Q1 15.  We are less sanguine about the immediate economic impact and a deep erosion in sterling could impact the trajectory of prices. 

Separately, the official measure of house prices rose 11.7% year-over-year in July, which is the largest increase since July ’07.   Upward pressure on prices seems to have broadened, but this still seems to be a more important issue for the Financial Policy Committee (FPC)  than the Monetary Policy Committee (MPC).  Or to say the same, the macro-prudential course is still preferable to a rate hike.