Remember when the thrust of all doctors’ advice was to keep your cholesterol down? Later it began to emerge that there was In fact bad cholesterol and good cholesterol. Now the same thing seems to have happened to deflation. There is bad deflation and good deflation and, according to Mark Carney, governor of the Bank of England, the kind that the UK is experiencing at present is unreservedly of the good sort. This does not surprise us, as we alluded to this phenomenon ourselves as far back as last December (Oil price fall and deflation… | Both of them are good).
He was speaking at the press conference that followed the Quarterly Bank of England Inflation report, yesterday. He also, tellingly, remarked that the most likely future direction for UK core interest rates is up.
All in all, this was a bullish report from the governor and his colleagues. At the same time that the drop in energy prices is creating additional spending power in the economy, even if it is leading to a technical fall in the inflation rate, the labour force participation statistics and the level of wage rises are also improving.
The press conference was also of abiding interest for the answers supplied to questions from reporters. These ranged from the ability of the Bank of England to prevent leakage of reports such as the Quarterly Inflation Report into the hands of currency traders in advance of official announcement times, to the credibility of central banks in the light of the recent “Black Swan” move by the Swiss National Bank (SNB). As is his wont, Mr. Carney was also not shy about giving his opinions on the unfolding story of the Euro.
A possible bottoming out of the Pound Sterling
The movement of the Pound during and after the press conference was to the upside. So much so that, if it is continued in the days ahead, it will amount to a breakout from the down channel the GBPUSD pair has been in for quite some time.
Yesterday’s soft US retail sales figures and a generally over-bought US dollar could have the effect of reinforcing this tendency. Any move towards the 200 day Exponential Moving Average (blue curve on the chart above) will be carefully noted by market participants.