Wednesday, December 3, 2014

UK fiscal policy is political | All eyes on Mario Draghi today

Yesterday the UK Chancellor of the Exchequer, George Osborne (above), delivered his economic statement, a twice yearly event, for autumn 2014. This is where the responsibility for fiscal policy (the gathering of income that will be available to the exchequer and its disbursement through government spending) is firmly separated from that of monetary policy (the management of interest rates, inflation and anything else to do with the pound Sterling), which lies with the Bank of England.

The BoE strongly defends the independence that was granted to it by legislation passed in 1998. So much so that its governor, Mark Carney, can become quite testy when challenged by reporters with any question that might imply that the interest rate cycle, for example, is guided in any way by the general election timetable.

Fiscal policy, however, is fair game for political manoeuvre. The British Labour party opposition MP, and former Chancellor of the Exchequer, Alistair Darling, calls yesterday’s statement “One of the most political I have ever heard”.

Fiscal policy, of course, political influences notwithstanding, is of interest to us insofar as it might be likely to affect the value of the pound, although our analysis of what Mr. Osborne said is confined to the reaction of the market. And it would appear that the market did seem to like what was said, at least as far as yesterday’s chart is concerned. Or it could be that yesterday it was the turn for an up day in the range that Cable (GBPUSD) has been maintaining since the middle of last month, bounded at the top by the 25 day Exponential Moving Average and at the bottom by the nice round figure of 1.56:

In Technical Analysis terms this is a falling wedge, which has bearish implications, but we are not so sure. Sterling will rise, and that could happen sooner rather than later.

The Bank of England will have its day in the sun today, when it makes its interest rate decision and its monetary policy statement, at 12:00 noon.

All eyes on Mario Draghi today

Today is ECB day, when the European Central Bank announces its interest rate decision (“no change” is expected here) and its monetary policy statement for December, which will be followed by a press conference given by Mario Draghi and Vitor Constancio, President and Vice President of the ECB.

The big question for the markets relates to the decisions that have been made by the bank with regard to Quantitative Easing in the Eurozone. Yesterday the Euro suffered a fall, apparently in anticipation of a monetary policy statement today that would include some form of QE. If this does not happen there will be a reaction to the upside.

In any event, Mr. Draghi’s every word will be parsed for implications, both in the statement and in the press conference afterwards. Expect a high level of short-term volatility in the Euro currency pairs, and in others that fall within its influence.

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