The Pound And The Fed

The surprise winner today in the markets was – drum roll – Great Britain. A number of economic reports say that GB is in the midst of an economic surge that follows many years in the doldrums. Wages grew a whopping 2.1% in December, although that is an average and much growth was in higher-end occupations. Inflation remained subdued.

The British pound surged higher, though it has now fallen back some. It dragged the U.S. dollar up. The euro, which took a beating at the hands of the pound, is just above US$1.13.

The yen stabilized on comments from central bankers in Japan that they saw no more need for easing of any sort. We think that’s premature.

Gold finds itself fighting for a place at the safe-haven table; the pound, yen and dollar all are crowding out the yellow precious metal. The news that the rest of the EU and Greece are inching closer to a deal has renewed pressure on gold. It did fight back from what looked like a big losing day to near even, however. Perhaps it rebounded on the dovish Fed statements in minutes of the January meeting. We think it’s bargain hunters who looked at two days of pounding and thought it was time to jump in.

One of the FOMC opening statements sums up the rate-setting committee’s posture, in brief:

“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.”

The Fed also cited “tepid wage growth” and “weakness of core inflation” as serious concerns.

Bloomberg had this to say about another matter on the Fed’s collective mind: “A gauge of expectations for inflation starting five years from now, based on Treasury securities, dropped to as low as 1.75 percent last month, data compiled by the Fed show.”

Perhaps, though buried in the minutes, of most concern to the Fed is the continuing strength of the dollar. We may be entering a period where government officials try to “talk it down.” The committee also voiced pleasure that other countries were in the midst of or planning quantitative easing programs, which takes pressure off the world’s biggest economy to pull the entire freight train.

Regarding gold, a talked up dollar would be of immense help.

A pullback on oil prices hurt American equities today. West Texas Intermediate is trading off about 2.75% and Brent is down almost 3.00%. Those prices also exerted a pull down on gold. The Dow and S&P are down while the NASDAQ is largely unchanged. The Dow has the largest presence of energy-related companies on its index.

Wishing you as always, good trading,