Bank of England’s call on interest rates set to be in focus
Today's news headlines:
- 'Sterling stuck near two-week low as Brexit rhetoric sharpens’. Despite a damning indictment from Donald Tusk, the Pound’s slide was abated yesterday with the market remaining optimistic that a deal could still be delivered in time. (Reuters)
- 'Steven Mnuchin says trade talks very productive so far, confirms he's headed to Beijing next week’. The US Treasury Secretary is painting an upbeat picture over progress in the trade dispute and will be heading to Beijing next week but has refused to speculate on the outlook. (CNBC)
- 'What the Bank of England would be doing if it weren’t for Brexit’. Today sees the central bank's first monetary policy meeting of the year and had Brexit not been on the cards, a rate hike would probably have been seen by now. However, with PMI readings coming in below trend and inflation slipping back, Mark Carney may cast a dovish tone, at least in the short-term. (MarketWatch)
Bank of England rate outlook
Mark Carney will today preside over the first monetary policy statement of the year, which will include the central bank’s quarterly Inflation Report. Seemingly, Brexit has restrained the Bank of England’s (BoE) capacity to raise interest rates, but with indications of a strong decline in business conditions, there’s every expectation that a cautious tone will be struck regarding the short-term outlook. Market participants will carefully weigh each statement from the Governor’s speech to tease out an indication of future policy and determine if further downward pressure on the Pound is warranted.
Donald Tusk’s caustic words directed at certain UK politicians failed to rattle the Pound yesterday. Despite the subsequent humour he shared with Irish PM Leo Varadkar, markets appear convinced that a deal can still be delivered and so brushed off this latest assault. The message is that the much-needed concessions from Brussels will likely emerge at some point, but the UK’s departure is drawing ever nearer which makes the Pound increasingly susceptible to news-driven volatility.
US/China trade war
The clock is ticking for the US and China to resolve their differences over trade before the next round of tariff increases is scheduled to take place on March 2nd. However, senior US officials are now said to be ‘committed’ to finding a resolution, something that would have the potential to fuel risk sentiment in currency markets, if it can be delivered. A shift to so-called ‘risk-on’ would likely lead to Dollar weakness, while providing some respite to the embattled Pound.
The Pound has posted a fifth consecutive day of declines against the US Dollar, although the pace of selling has abated as the market waits for the next signals. The Bank of England has the potential to deliver today with its call on interest rates in the medium to long-term.
Another day of losses for the Euro against the US Dollar as the retreat from the highs seen at the end of last month continues. While optimism over the US-China trade deal could provide some support, the European Central Bank’s (ECB) monthly Economic Bulletin could see forecasts downgraded.
The Pound has traded in a very tight range against the Euro over the last 24 hours with a lack of fundamental data contributing. This theme is likely to change today with news from both the BoE and ECB, plus Theresa May’s latest trip to Brussels. As ever with speeches, volatility is likely on the cards, but direction is nearly impossible to call.