Market Info

It’s ‘Super Thursday’ for the Bank of England: MPC meeting and Quarterly Inflation Report mean a choppy day ahead for the GBP

08/02/2018 | OzForex

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Yesterday morning in Europe, GBP/USD made another attempt to get back on to a 1.40 ‘big figure’ but fell short by just a few pips before then losing more than a full cent against a strongly recovering US Dollar to a low in the mid-1.38’s. In his appearance before a House of Lords Select Committee last week, BoE Governor Carney hinted that the Bank is preparing to upgrade the forecasts in its Inflation Report. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.” The easiest call to make is that Bank Rate will be kept unchanged at 0.5%. The interest rate market currently prices between two and three 25bp hikes over the next three years. Looking at a selection of forecasts from the major banks, there’s quite a split of views. Barclays say, “Overall we expect the Bank to remain in wait-and-see mode after its November hike and refrain from revising its communication in the absence of relevant events or data since the last inflation report. We retain our call for a next hike in November 2018.” Citi say, “New forecasts may show stronger growth and higher inflation rates, although the Bank will likely remain cautious due to Brexit uncertainty. We currently expect a Bank Rate hike by 25bp in Aug-18 and one hike per year until 2020”. UBS, meantime, say the BoE will hike rates during the May meeting. In terms of UK growth, the bulls at UBS have also revised upwards their growth outlook for the UK and see the economy growing 1.4% in 2018 and 1.2% in 2019, compared with the 1.1% previously for both years. On the other hand, RBC note, “Updated Inflation Report projections probably won't result in wholesale changes for GDP and CPI, but ongoing optimism on the global outlook, prospects for pay growth and potential revisions to estimates of slack will have to be factored in”. With little genuine consensus on rates or the economy, there is the prospect of plenty of volatility in the GBP from midday onwards when a barrage of headlines hit the newswires.

Something different began to happen in Wednesday’s trading in the Northern Hemisphere day. During the previous few days of extreme equity market volatility, the USD tended to do well as stock markets fell, with its best session (the European morning on Tuesday) coming as equities were smashed and US 10-year yields fell back to 2.70%. As the US indices recovered sharply Tuesday afternoon, so the US Dollar gave back all of its morning gains. This pattern continued into Wednesday, as the early call for the DJIA to open 200 points lower helped underpin the USD. But, as stocks extended gains and bond yields rose back to 2.83%, so the US Dollar continued to rise and finished the day at the top of our one-day performance table. Dallas Federal Reserve Bank President Robert Kaplan Kaplan said Wednesday, the recent selloff is "basically a market event and these things can be healthy." Federal Reserve Bank of St. Louis President James Bullard said the latest market decline was no surprise given the elevated valuations of technology stocks and absence of any recent drops. “This is the most predicted selloff of all time because the markets have been up so much and they have had so many days in a row without meaningful down days”. Federal Reserve Bank of New York President William Dudley, meantime, said recent stock-market declines weren’t that big and don’t yet change his outlook for the U.S. economy. “The stock market had a remarkable rise over a very long time with extremely low volatility… My outlook hasn’t changed just because the stock market’s a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago.” There’s certainly no sign here either of concern about a deeper stock market correction, nor any desire at all to signal rates won’t be raised at the March FOMC meeting. There are no top-tier US economic data releases scheduled for the rest of the week in the US, though it will be interesting to see if weekly jobless claims later today can extend their recent decline even further into record-setting territory. The US Dollar opens in London pretty much unchanged from New York closing levels.

 

FX markets in the Northern Hemisphere on Wednesday were much livelier as investors tried to digest news of the new Coalition government in Germany. We have seen what happened in the VIX market in the US when investors in a very crowded trade all tried to pile through the exit at once and there were some tentative signs in EUR/USD that the same might be happening in foreign exchange. Perhaps the most ‘crowded’ trade over the last few months has been long of EUR/USD as incoming economic news in the Eurozone continues to improve and investors have continually revised up their expectations for growth and the exchange rate. Yesterday, however, the EUR fell over a full cent in the late European afternoon; its first time back on a 1.22 handle in two weeks. On the one hand – as the economists say! - there was some relief that Germany might avoid a fresh, destabilizing Federal Election, but on the other is a concern that Ms Merkel might have conceded too much to the left-wing SPD. Early reports suggested that the SPD would be handed the Finance Ministry - a major victory for the Social Democrats - while CSU leader Horst Seehofer, one of the most conservative figures on Merkels side, would become Interior Minister. The SPD also look set to keep control of the Foreign Ministry and the Labor Ministry, with party leader Martin Schulz reportedly keen to be Foreign Minister. The SPD leadership confirmed the Coalition agreement in a group WhatsApp message, which began, "Tired. But satisfied." Today brings the ECB’s Economic Bulletin while there are no less than four Governing Council members all giving speeches during the European morning. With EUR/USD now down 2 ½ cents from last Thursday’s high, it will be interesting to see how the FX market reacts to whatever signals they may offer.