Sterling lumbers through the fog of Brexit

Sterling gains despite the Bank of England cutting growth forecasts and signifying fewer rate rises on the horizon as the “Fog of Brexit” clouds the BoE's expectations.

Previous Day's Market Highlights

As expected, the Bank of England (BoE) Monetary Policy Committee (MPC) unanimously voted to keep interest rates on hold on Thursday, however a sharp downward revision to growth forecasts and a move away from plans to increase rates initially weighed on the pound. The MPC cut their GDP growth forecast to just 1.2% for the year, the lowest rate since the financial crisis, while also cutting their forecasts for interest rate increases to just 1 rate hike over the next 2 years with the softening of economic activity being blamed on the “fog of Brexit”. The tweak to forecasts was viewed as dovish by markets, with sterling losing around 0.5% in immediate reaction to the release, though the BoE maintained their tightening bias by continuing to state that rates will need to rise at a “gradual pace and to a limited extent”.
 
However, the pound rebounded strongly after the Governor’s press conference where Carney emphasised the upside risks to the Bank’s forecasts and investors reflected that the Bank’s tightening bias remained in place. The pound ended the day with a gain of around 0.4%, including a 0.8% rally post-press conference after briefly touching a 2-week low against the dollar
 
Elsewhere, Brexit talks between the UK and EU yielded nothing new with the EU continuing to state that the Withdrawal Agreement would not be reopened though the discussion between leaders was said to be “robust but constructive”. The next key date for Brexit comes next week with a planned vote in Parliament on the renegotiated deal. The economic calendar was quiet, with only initial US jobless claims of note, which were released broadly in line with expectations.

Away from FX, European equities recorded significant losses, with the pan-European STOXX 600 recording its first losses in a week, losing 1.4%. Meanwhile, US equities fell by more than 1% as concerns mounted that the US and China would not reach a trade deal by the March 1st deadline. Finally, crude oil fell, with WTI losing around 3.5% as markets continued to react to record US production and rising inventories.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1416 1.1604 1.1127 4.11%
GBP/USD 1.2939 1.3218 1.2667 4.17%
EUR/USD 1.1335 1.1570 1.1289 2.43%
GBP/AUD 1.8265 1.8522 1.7639 4.77%
GBP/NZD 1.9144 1.9426 1.8701 3.73%
GBP/CAD 1.7230 1.7498 1.6835 3.79%

Today's Market Highlights

The week concludes with a sparsely populated economic calendar, with only January labour market figures from Canada of note. Expectations are for a slight increase in the unemployment rate, to 5.7%, with employment change figures once again set to remain muted around the 6.5k level. Such figures would not be overly welcome news for the Bank of Canada and their data dependent stance as, with wage growth sluggish as well, significant slack appears to remain in the labour market likely delaying any potential rate hikes.
 
Central bank speakers are also thin on the ground after yesterday’s BoE meeting, with only Fed voter Bullard, a more dovish member of the FOMC, set to speak. He is likely to reiterate the Fed’s patient and cautious stance after their policy U-turn at the end of January.
 
Looking ahead to next week, the economic calendar is busier with GDP figures from the UK and eurozone set to be in focus in addition to CPI inflation releases from the UK and US. Specifically, Germany’s GDP release will attract significant attention after a spate of poor economic data has heightened the risk of Europe’s largest economy falling into recession. Finally, the RBNZ also announce their latest policy decision while a Brexit vote is due to be held in Parliament after this week’s UK-EU discussions over an alternative to the Irish backstop.

Today's Economic Calendar

Time Currency Release Consensus Previous
13:30 CAD Employment Change 6.5k 9.3k
13:30 CAD Unemployment Rate 5.7% 5.6%