Doves Fly at the BoE; Trade Optimism Returns

Sterling struggles on BoE’s dovish, downbeat tone; risk appetite improves as trade optimism returns; US consumer sentiment eyed today

Previous Day's Market Highlights

Before getting onto another shift in the trade war, let’s turn attention to Threadneedle Street, where some doves have been spotted breaking cover.

The Bank of England (BoE) kept monetary policy unchanged on Thursday, however, two policymakers - Michael Saunders and Jonathan Haskel - dissented, voting in favour of an immediate 25bps rate reduction. The rationale behind this move was due to ‘subdued’ core inflation, signs of the labour market ‘turning’, and ongoing ‘downside risks’ to the BoE’s projections. Saunders’ dissent is the more notable, having dissented in favour of hiking interest rates just 18 months ago. Having completed the round-trip from hawk to dove in light of recent economic developments, perhaps Saunders is the MPC bellwether that we should be following and paying close attention to.

Other areas of the Bank’s policy decision were largely as expected, generally striking a more downbeat tone than at September’s MPC meeting. Policymakers have retained their notional tightening bias, indicating that ‘limited and gradual’ hikes will be required, however rate increases are now contingent on both a global economic recovery and receding Brexit uncertainties. Hence, don’t go expecting any tightening in the near future. Governor Carney was also cautious in his press conference, emphasising downside risks to the economy, and nodding towards the possibility of rate cuts; indicating that ‘reinforcement’ may be required if downside risks were to emerge.

For the pound, the downbeat economic assessment and cautious tone exerted pressure. Sterling slid 0.3% against the dollar, briefly touching a 3-week low below the $1.28 handle. Against the euro, sterling declined 0.1%.

The pound was, however, largely unaffected by Thursday’s political developments. With the campaign now in full swing, political promises and policy announcements have begun, with Chancellor rivals Sajid Javid (Con) and John McDonnell (Lab) engaging in an arms race of giveaways - sending government spending soaring. Also of note on Thursday was the announcement of a ‘remain alliance’ between the Liberal Democrats, Greens and Plaid Cymru. The agreement will see two of the three parties stand aside in up to 60 seats, in an attempt to avoid splitting the ‘remain’ vote.

Turning to trade, after sentiment soured on Wednesday, Thursday saw investors grow increasingly optimistic that a US-China deal was close.

Trade optimism was sparked early in the European session by reports that both superpowers had agreed to lift retaliatory tariffs as the each phase of the trade deal progresses. These reports were later confirmed by US officials, along with details that negotiators had held ‘constructive’ talks - further fuelling risk appetite as tensions showed further signs of thawing. As a result, the dollar gained around 0.25% against a basket of peers, hitting its best levels since mid-October. Both antipodeans also gained ground, the Aussie dollar being the standout performer, adding 0.5% over the course of the day.

Conversely, safe-havens struggled, with the Swiss franc losing 0.3%, and the Japanese yen shedding 0.4% - the latter hitting its weakest levels against the dollar in more than 5 months. Meanwhile, Treasury yields (which move inversely to price) surged, gaining around 10bps across the curve. The yield on 10-year notes gained as much as 15bps, the biggest move since President Trump’s election, and the highest yield since August.

Elsewhere on Tuesday, the euro struggled after the European Commission downgraded its growth forecasts, indicating that the bloc’s economic woes may not yet be over. The Commission expects growth of just 1.1% this year, and 1.2% next year, as a global economic slowdown and mounting uncertainties continue to depress activity. The common currency settled close to a 3-week low, shedding 0.2%.

In other markets, trade optimism supported equity markets on both sides of the Atlantic. In Europe, the pan-continental Stoxx 600 gained 0.3%; while the US benchmark S&P 500 gained 0.27%, notching a fresh record high. Finally, oil prices also rallied on trade optimism, with both Brent and WTI settling around 1% higher.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1590 1.1661 1.1427 2.01%
GBP/USD 1.2805 1.3012 1.2515 3.82%
EUR/USD 1.1050 1.1179 1.0991 1.68%
GBP/AUD 1.8615 1.9094 1.8518 3.02%
GBP/NZD 2.0125 2.0559 1.9875 3.33%
GBP/CAD 1.6895 1.7095 1.6670 2.49%

Today's Market Highlights

What has been a busy trading week concludes with a relatively quiet economic calendar, likely to see political and geopolitical developments remain at the forefront of investors’ minds. Broadly speaking, developments in US-China trade relations will remain the primary factor driving risk appetite, with market participants hoping that the present optimism continues into the weekend. 

Meanwhile, for sterling, ongoing general election campaigning will remain the primary focus. Risks for the pound remain skewed to the downside, with the outcome of December’s election extremely difficult to predict, and opinion polling beginning to show signs of the Conservative’s lead over Labour narrowing. It would not be a surprise to find some modest sterling weakness today, in particular, as investors are likely to trim positions and take some risk off the table before the weekend.

Turning to today’s data releases, this afternoon’s preliminary consumer sentiment figures from the University of Michigan are expected to show the US consumer remaining modestly upbeat, with the index likely to consolidate around the 95.9 level. Of course, the FOMC will be paying close attention to the index, with a solid pace of personal consumption the main factor underpinning the current US economic expansion. Signs of softer sentiment will likely weigh on the greenback.

Today’s other notable release comes from Canada, in the shape of October’s labour market data. The market is expected to remain tight, with unemployment expected at 5.5%, just above its record-low. Such a low unemployment rate should continue to exert upward pressure on earnings, which increased by 4.25% YoY in September. Meanwhile, job creation is expected to continue its hot streak, with employment expected to increase by a net 16,000 - the third straight month of gains.

Looking ahead to next week, the economic calendar is well-populated. From the UK, while political developments will continue to dominate, 3rd quarter GDP, September’s labour market figures, and last month’s CPI inflation data are all due. Meanwhile, CPI is also due from the US and eurozone, while Australian labour market figures will also be in focus. In Germany, third quarter GDP is likely to show the economy contracting, putting Germany into a technical recession. Finally, monetary policy will remain in focus, with the RBNZ set to announce a further 25bps cut, and Fed Chair Powell testifying to Congress. 

Today's Economic Calendar

Time Currency Release Consensus Previous
13:30 CAD Unemployment Rate (Oct) 5.5% 5.5%
13:30 CAD Net Change in Employment (Oct) 15.9k 53.7k
15:00 USD Prelim. University of Michigan Consumer Sentiment (Nov) 95.9 95.5