It’s Super Thursday!
February 2nd: Highlights
- Brexit vote passes comfortably
- BoE gives interest rate decision and views on inflation
- Dollar falls on trade spat
Brexit clarity boosts Sterling
There were two further positive events that added to the general optimistic feel for sterling. Liam Fox, the Trade Minister, said that the U.K. planned to use the EU blueprint in trade deals with more than forty countries, once it leaves the single market, rather than negotiate fresh new deals. A report from EU headquarters in Brussels concluded that negotiators will need to strike a “workable deal” which protects the City of London to avoid damage to remaining member states economies.
Having seen Cable test the support level at 1.2440 the previous day, Sterling rose by almost 2% to test the resistance level of 1.2680. On a technical basis, a break of 1.2680 could lead to a test of 1.3000.
Today sees the release of the Bank of England’s Quarterly Inflation Report. It is sure to report concerns over an uptick inflation given the collapse of the pound over 2016. The report gives detailed economic analysis and inflation projections on which interest rate decisions are based. It presents an assessment of the prospects for UK inflation over the next two years, which provides the market clues as to what the Central bank is thinking and how it react to economic data.
The Bank of England also meets today to review monetary policy. Against this backdrop of positivity, the Governor will likely confirm that all nine members of the committee voted to leave rates unchanged. Any change to a more “hawkish” tone will be noted by the markets and set the pound on a further move higher.
The Bank of England’s asset purchase programme, which injects liquidity into the economy by buying back Government Bonds, is likely to remain unchanged.
The rise in the pound over the past couple of days has been mostly attributable to the weakness of the dollar. Against the Euro, the pound has seen a less significant rise. Yesterday the pound strengthened to trade, briefly, around 1.1765 before falling back to around the 1.1740 levels.
Euro soars against weaker dollar
The euro rose above 1.08 for the first time since early November and the dollar index, which measures the value of the dollar against a basket of six major trading partners, fell to its lowest level since early December.
Traders will start to turn their attention to tomorrow’s employment release. Following last month’s disappointing report the market will be looking for an upward revision of the 156k figure. The January number is likely to be closer to 175k.
The FOMC met yesterday in a meeting that was always going to be low-key. There was zero expectation of any change in rates although a positive affirmation of the “three hike” scenario was expected. The U.S. central bank said job gains remained solid, inflation had increased and economic confidence was rising, although it gave no firm signal on the timing of its next rate move.
Janet Yellen, the Fed. Chairperson also gave an upbeat message on the performance of the consumer and highlighted the unemployment rate which hovers near 4.7%. In the U.S. a rate below 5% is considered close to full employment. Any perceived shortage of labour will see wages rise and the Fed raise rates faster.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”