Lower interest rates on the horizon?

​​​​​Today's news headlines:

  • ‘China seeks to contain virus outbreak as death toll rises’ – China is increasing screening and control procedures to help tackle the outbreak of the coronavirus which has spread to the US. Today, the World Health Organisation (WHO) will decide whether to declare the virus an international emergency. Chinese equities and the Renminbi have sold-off this week, as investors fear the virus will hurt Asian economies, just like 17 years ago during the SARS pandemic. (Bloomberg)
  • ‘Is Sajid Javid’s economic growth goal attainable?’ – Last week, Javid declared his ambitious goal to boost UK economic growth to around 2.7 to 2.8% per annum. However, the Bank of England believe the UK’s potential growth rate is just 1.5% per annum over the next few years, and economists highlight the drawbacks that the UK faces; such as an ageing population and chronically weak labour productivity. (Financial Times)

A big call

If we were to sum up 2019 for Mark Carney and his pals at the Bank of England, it’d probably be full of phrases like ‘The cloud of Brexit’ or ‘waiting for clarity’. Because of this, the UK’s central bank managed to come through the year without the need to alter their base rate from 0.75%, despite a decidedly dovish tilt by other major central banks. Depending on your viewpoint, Brexit uncertainty is now a thing of the past, or at the very least has been pushed to the back-end of this year. However, the effect of the Brexit paralysis has been evident in recent data. Inflation is at its lowest in three years, month-on-month growth is negative and retail sales have not been positive since July last year. As a result, members of the central bank’s monetary policy committee have hinted towards an upcoming interest-rate cut.

We touched on the UK’s latest employment data yesterday, which has certainly given the UK’s central bankers something to think about, but as a lagging indicator it’s unlikely to hold the same importance as PMI data due on Friday. Markets are still leaning towards a rate cut and Barclays have changed their forecast from unchanged to a 25bps cut next week, with the rationale that the BoE will seek to avoid 2019 weakness spilling over into 2020. To add to the likelihood of lower rates, MPC member Michael Saunders has recently suggested that a cut could be easily unwound if the economy rebounds.

Bottom Line: Does yesterday’s strong labour data really change much for the BoE’s monetary policy committee? We’d argue no. For a long time, we’ve known that the labour market has been the most resilient part of the British economy, despite a backdrop of slowing growth and political turmoil. Markets are still betting on a BoE rate-cut this month and it’ll take a significant improvement in Friday’s composite PMI data to change our mind that lower interest rates are on the immediate horizon.

GBP/USD

Yesterday morning, Cable climbed after better-than-expected UK labour market data raised doubts over the Bank of England’s heavily priced in January interest rate cut. The pair briefly climbed to its 20-daily moving average to 1.3084 before stalling, but still closed the day in the green. Today’s light UK and US economic calendar could bring a flatter session today as both the USD and GBP trade-weighted indexes are supported by their 50-daily moving averages.

GBP/EUR

The currency cross is pushing the 1.18 level again after yesterday’s strong UK labour market data boosted the Pound, while the Euro index remains at the bottom of it trading range. This morning, the Sterling index opened above its 50-daily moving average - a level that could provide support for the remainder of the week. A deterioration in this morning’s Italian industrial orders and sales could further weaken the Euro today, aiding the pair’s climb to the 1.18 level.

EUR/USD

Yesterday, the pair briefly climbed above the 1.11 figure, before closing below the level and extended losses on London open this morning. EUR/USD implied volatility – which determines option prices – posted new all-time lows as its trade-weighted index drifted further into the bottom-end of its ten-week trading range.