30 January 2020: Rate cut unlikely to gain majority

Rate cut unlikely to gain majority

30th January: Highlights

  • Will they or won’t they
  • Powell acknowledges virus “uncertainty
  • Eurozone companies struggling with manufacturing recession

Sterling volatility set to continue

Remember Brexit? Or is that last year’s news?

Brexit was the most important issue for decades to the UK and had us all tuning at 7pm to watch a seemingly continuous stream of votes in Parliament as the Opposition stymied every attempt from the Government get to a deal done with Brussels.

Well, today is the day that all the fuss was about. The UK officially leaves the EU at 11pm tonight. This morning’s national newspaper headlines appear to have missed the importance of the event as just one paper mentions Brexit on its front page.

Public interest in Brexit was waning before the stunning election victory last month from Boris Johnson’s Conservative Party. Maybe the fact that this is a “phoney” departure is the reason for the lack of fanfare? The real Brexit leaving date is 31st December this year, when the trade deal will have been agreed and the transition period can come to an end.

This morning’s Bank of England Monetary Policy Committee meeting has been labelled as the most important of the entire “Brexit period”.

Why? Because several members of the committee have said in speeches over the recent weeks that they may vote for a cut in short term interest rates should they feel that the faltering economy needs stimulus.

Since Central Bankers rarely make such decisions on the spur of the moment given their reliance on series of data and trends in the economy., it seems highly unlikely that a member would vote today any differently than they would have when they made the comments. The fact that one of those making the comment was the outgoing Governor, Mark Carney, has added a certain level of credence.

The effect on Sterling over the past three weeks or so has been to increase volatility without any real direction emerging. Once the vote is out of the way (most likely now for rates to stay on hold). The market will go back to considering the range of outcomes from the Brexit trade negotiations and the effect on the economy of the Chinese Coronavirus outbreak.

Yesterday, the pound was virtually unchanged on the day. It again fell briefly through the 1.30 level versus the dollar but recovered to close at 1.3015 just four pips lower than its opening level.

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FOMC “snoozefest” leaves markets reassured

The Federal Open Market Committee met in New York yesterday, announced that rates would be left on hold and made a brief statement on that news. Later, Jerome Powell, the Chairman of the Committee held a news conference at which he said……. very little.

The market has rarely seen an FOMC meeting that held so little excitement and it seems that traders agreed with Powell’s assessment that the economy is doing OK.

The Fed’s statement changed just three words from December’s meeting; inflation is now returning to its 2% target, it is no longer near to it and household spending is moderate, not strong.

The Bloomberg news service labelled the meeting as dull and it is hard to disagree. The one marginally interesting take away from the meeting is that Powell’s reference to inflation is marginally dovish as it implies that a rate cut is just about a little more likely that a hike right now.

The real news right now is the effect of the Coronavirus outbreak on the economy inasmuch as China’s certain slowdown will feed through. The other story is the continuing impeachment trial of President Trump, although there is only one detail from that which interests traders; guilty or not guilty.

So, Fed Watchers shift their gaze to March 19/20 when the next FOMC will be held, while traders put their views on hold awaiting solid information and data. They will have to wait another week for the January employment report which will draw more attention than the FOMC. Early indications are looking for a slim increase in new jobs created to around 160k following December’s 145k.

Yesterday, the dollar index rose to almost touch resistance at 98.20. It reached a high of 98.19 before closing at 98.04

Consumers remain confident

The latest figures for commercial and domestic lending for the entire Eurozone show a marked difference. While business borrowing fell to a two-year low, household loans are at a post-financial-crisis high.

While trade remains sluggish at best with companies borrowing falling from a 3.4% increase in December to a 3.2% increase this month, consumer lending growth rose from 3.7% from 3.5% its strongest increase in eleven years.

This won’t prompt the ECB into further stimulus, since it is merely another statistic which tells them what they already know; that economy is in dire need of a major injection of confidence as well as a major overhaul of several EU statutes.

The ECB’s latest stimulus package, introduced last September, was designed to keep finance flowing to business. However, there is an even more basic requirement for that initiative to have any effect.

That is that there must be a desire to expand and make greater use of both working capital and capital goods facilities. That is lacking across the region right now and is far more significant than the level at which firms are borrowing when compared to consumers. The only bright spark for the growing gap between domestic and corporate borrowing is that it cannot continue to widen at the current rate and may signal a coming turnaround. That may sound like eternal optimism but that is about as much as the region has to offer right now.

Yesterday, the single currency again dipped below the 1.10 level versus the dollar. It reached a low of 1.0992 before closing at 1.1007

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.”