08 Feb 2019: BoE highlights Post-Brexit growth reality

BoE highlights Post-Brexit growth reality

February 8th: Highlights

  • Volatile pound to facing economic facts of life
  • Safe haven dollar gains on global growth concerns
  • ECB Official Benoit Coeure confirms Central Bank concerns over the economy

Rate hike this year in doubt after Carney voices growth concerns

As was widely predicted, the Monetary Policy Committee of the Bank of England, which met yesterday, voted 9-0 in favour of leaving short term interest rates unchanged. There had been a lingering view in the financial markets that the Bank may have to consider hiking rates later in the year in order to protect Sterling post-Brexit and cool rising inflation.

That view was firmly quashed by BoE Governor Mark Carney who commented in his statement following the meeting that the UK faces a period of growth that will probably be seen as the slowest in ten years. However, he did hint that his growth forecast could be overly cautious should the UK and EU agree to a deal on the withdrawal agreement and future relationship.

While Carney’s comments brought a sense of realism to the debate, the market is still only really influenced by the prospects for Brexit as the pound’s reaction proved. There were several upbeat parts to the statement, not least of all in reference to the robustness of the labour market. That is despite the fact that analysts tend to take the employment report under advisement given the changes that have been made in what is considered “employment”, over the past thirty to forty years.

In the immediate aftermath of the Carney comments, the pound fell to a low of 1.2854 only to recover to close thirteen pips higher on the day at 1.2949 as traders’ optimism remains that a no deal Brexit outcome can be avoided.

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Dollar gains as global growth remains under pressure

The ongoing trade talks that are taking place between China and the United States are growing in significance due to concerns that China’s economic slowdown may accelerate if no solution can be found.

In a similar way to Brexit, the complex nature of the trading relationship between the two nations has been underestimated since it not simply a matter of fixing the yawning chasm between the level of Chinese exports to the U.S. versus their imports.

Intellectual property, strategic investments, and technological advances being made by China are a significant stumbling block to a deal being concluded. There is little opportunity for “interim” or “staged” agreements to be made since both sides enter talks with a deep mistrust of the other. This has been fanned by President Trump’s continued rhetoric over the past performance of China in “manipulating” its currency to the detriment of the trading relationship.

It is often difficult to discern the reason behind any major move in the value of the dollar versus its trading partners since there are manifold influences.

For example, last week, the dollar’s performance was more based upon the domestic issues of employment and short-term interest rates. This week the dollar is stronger based upon its safe-haven status as concerns emerge over the effect of slowing global growth on emerging markets and economies. The greenback is also influenced by the strength or otherwise of other G7 currencies as can be seen currently with both the pound and euro.

Yesterday, the dollar index rallied to a high of 96.68 and closed within eleven pips of that level. Over the past seven sessions, the dollar has gained every day and is now looking likely to make a fresh high for the year which currently stands at 97.71, although obviously, there is still some way to go.

ECB concerned but prepared to act over Eurozone economy

Benoit Coeure, a member of the Governing Board of the ECB, is one of the few members without a national Central Bank “portfolio”. He is able to take a wholly independent view of the state of the economy of the region. As such his deliberations hold a level of significance for the market similar to those of ECB President Mario Draghi.

Yesterday, Coeure backed the recent comments by Draghi in agreeing that the Eurozone economy is slipping towards a recession although he was slightly more optimistic that the ECB either has the tools to combat the slowdown or the resources to create them.

While conceding that the economy is facing a broader and longer lasting slowdown than had been originally forecast, he believes that the “jury is still out” and more evidence is necessary before concluding that it will be a lasting and serious recession.

This week’s publication of activity indexes tends to back up M. Coeure’s comments since despite being weak they remain above the point of indicating a contraction and were, in fact, marginally stronger than the previous release.

Next week sees the release of economic sentiment data as well as industrial production and the preliminary publication of Q4 GDP. Each of these pieces of data will go towards building a picture of the prospects for the economy moving forward and while expected to be weak, it is the degree of weakness that will affect the single currency.

Yesterday, the euro fell to a low of 1.1323 against a strengthing dollar but managed to close a little higher at 1.1342 as a bout of profit-taking set in late in the day.

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.”