UK economy under the microscope
Today's news headlines:
- ‘Lagarde’s ECB review rush may see inflation goal decided by July’. Lagarde has set out an ambitious timetable to review the ECB after concerns over the institution’s credibility have been rising. The European Central Bank’s (ECB) first strategic review since 2003 could see a decision on changing the inflation goal by this summer. (Bloomberg)
- ‘Sajid Javid to push for ‘permanent equivalence’ for City in Brexit talks’. The British government will seek to protect the City of London’s access to the European market by demanding the EU sign up to a ‘permanent equivalence’ regime. Chancellor Javid’s proposition comes after several financial services executives expressed concern that the EU could revoke equivalence agreements post-Brexit. (Financial Times)
The great unveiling
Since the beginning of the year, the UK economy has been under the microscope, leading to some erratic policy projections for the Bank of England meeting. January’s readings for Survey data, Output, Inflation and Consumer Spending were pretty diabolical. The only positive signs were an enduring labour market and some preliminary PMI data suggesting optimism on the horizon. Heading into the Bank of England press conference on 30th January, the Monetary Policy Committee were expected to cut rates by 25 bps with about 50% certainty. The BoE however decided to remain on hold and await further data in the coming weeks.
This morning, a whole host of data points are to be released, including GDP, Manufacturing Production, Industrial Production and Preliminary Business Investment. Following that, Mark Carney, the outgoing Bank of England Governor is set to testify before the House of Lords, where we might get a better sense of the MPC’s stance heading into a patch of further weakness. Now that we are into February, the UK’s Q4 performance should come into sharper relief and start to impact our expectations for the March MPC meeting.
Bottom line: Our sense is that the Bank of England will need to cut rates but taking action in January’s meeting would have led the market to ratchet up expectations for central bank support throughout 2020. Instead, we think the BoE is likely to wait until 26th March to cut and then switch to a Fed-like ‘data dependant’ approach. By that point we should know if Q4 was as dismal as the market had feared in January or whether we’ve seen a rebound in optimism the way No. 10 hopes.
Continued US Dollar strength sent Cable deeper into year-to-date lows, reaching 1.2872 yesterday morning. The pair later recovered some lost ground but opened London’s session this morning testing the 1.29 support level again, ahead of today’s UK GDP data. This afternoon, head of the Federal Reserve and the Bank of England will be speaking which may create some intra-day volatility for the pair.
The currency-cross edged higher in yesterday’s session, clearing the 1.18 figure once again. This morning’s UK data could be the main driver of price action throughout the day, along with Bank of England governor Mark Carney speaking later this afternoon. The 50-daily moving average at 1.1790 may provide support for the pair throughout the day.
The Euro posted four-month lows against the US Dollar and currently trades just above the 1.09 figure. US Dollar strength has continued into this week, pushing the pair lower, as economic concerns over the Coronavirus remain. With a light data calendar for both the Eurozone and the US, Fed chair Powell’s speech this afternoon may be a focal point for price action in today’s session.