Market Info

Stock market turmoil continues. GBP gets a boost from BoE rate hike talk though it does depend on smooth Brexit progress.

09/02/2018 | OzForex

Friday 9 February

British Pound (GBP)

We warned yesterday to watch out for a choppy day for the pound, not least because there was such a split of expectations on the timing of the next Bank Rate hike that there were bound to be analysts, investors and institutions forced to reassess their own forecasts. In his appearance before a House of Lords Select Committee last week, BoE Governor Carney had hinted that the Bank was preparing to upgrade the forecasts in its Inflation Report and this is exactly what happened; albeit the language was more aggressive than had been expected. GBP/USD surged more than 1½ cents from just below 1.39 to a high just over 1.4050. So far, so easy to explain…. Within the space of four hours, however, as the carnage continued in US asset markets, GBP/USD had reversed all its gains, coming back to its launching point with the precision of a Falcon-Heavy booster. GBP was still the best performer of the day although its 200+ pip gains against both the AUD and NZD were more than halved.

In revising up both its UK and world growth forecasts, the Bank of England said that, “Over the past year, a steady absorption of slack has reduced the degree to which it was appropriate for the MPC to accommodate an extended period of inflation above the target. Consequently, at its November 2017 meeting, the Committee tightened modestly the stance of monetary policy in order to return inflation sustainably to the target. Since November, the prospect of a greater degree of excess demand over the forecast period and the expectation that inflation would remain above the target have further diminished the trade-off that the MPC is required to balance. It is therefore appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon. The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.”

In his subsequent Press Conference, the Governor was keen to play down the scale and speed of interest rate hikes and despite much probing from journalists, refused to agree that interest rates are likely to rise in May. The Statement noted, “Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent”. Market pricing doesn’t yet have a May hike as a done deal, though the implied probability of a 25bp increase has increased from just under 50% to something nearer 70%. All this, of course, is predicated is based on two Brexit factors - that there is “a smooth transition”, and that it leads to an “average of potential outcomes”. Let’s see now what the politicians can do to facilitate this…

US Dollar (USD)

USD/GBP expected range: 1.3900 – 1.4095 The volatility across asset classes continues with the Dow Jones Industrial Average down 1,000 points yesterday. The latest move lower came with little or new fresh news, and amidst a general feeling that many of the forced buyers of VIX had already covered their short positions earlier in the week. Instead, there’s now a worry that the so-called ‘risk-parity’ funds might be the next wave of forced sellers, liquidating positions as both equities and bonds are delivering simultaneous negative returns. The US Dollar tends to do well in periods of asset market chaos and so Thursday was another day of general USD strength its index against a basket of major currencies climbing to a two-week high around 90.25.

Federal Reserve Bank of New York President William Dudley said recent stock-market declines weren’t that big and don’t yet change his outlook for the U.S. economy. “This wasn’t that big a bump in the equity market… 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. Having a bump up like this has virtually no consequence on my view of the economic outlook”. In US stock markets over the past tow decades, there has been lots of talk of the “Greenspan put”, the “Bernanke put” or the “Yellen put” to describe how stock market traders feel they are insured against declines by the Federal Reserve Bank. Perhaps the strike price on the “Powell put” is a bit lower than they’ve become used to…

There are no major US economic data releases scheduled for today and FX traders have never, ever been interested in wholesale sales numbers. However, the inventories number feeds directly into the Atlanta Fed GDP model which will be updated later this afternoon and currently estimates Q1 GDP at 4.0%. The USD index opens in Europe this Friday morning around 89.95.