Bank of England Governor Andrew Bailey continues to speak to UK parliamentarians but has mostly avoided talking about the outlook for monetary policy since his initial remarks.
If anything, his comments didn't dissuade anyone from the belief that rate hikes are coming and that the balance sheet will soon start running off. The higher UK inflation numbers today gave the pound a broad lift and the euro is chopping sideways. That's lowered EUR/GBP to the lowest since February 2020.
That low is now just over 60 pips away and a look at the long-term weekly chart shows how pivotal it might be.
What we're seeing on the fundamental side is the emergence of economic divergences. The pandemic essentially reset all global monetary policy to zero but we're seeing different inflation dynamics emerge along with different philosophies in tackling it.
The ECB is married to the idea of keeping rates low and the eurozone economy is likely to be less resilient to higher rates. The Bank of England is certainly more willing to hike and the ability of the UK to deficit finance in a way that eurozone countries can't, is likely to keep the economy humming hotter.
Furthermore, the large open markets in the UK and cheap valuations of UK stocks, could add an element of financial flows.
On the flipside, I'm watching bunds closely. The rise above 0% today could lead to a flurry of related flows and give the euro some legs. The comments from Villeroy today also offer a hint that the ECB might be growing uneasy with inflation. He said:
- Sequence will be: Tapering, then lift off and eventually downsizing
- We will keep full optionality about the speed of this sequence and will definitely be data driven
- ECB will gradually adjust monetary policy to firmly ensure inflation recedes soon
Those aren't exactly the comments of someone overly worried about inflation but -- between the lines -- they're more worried about inflation than disinflation for the first time in a long time.