02 Nov 2017

Market Brief: Long-awaited UK rate hike looms today

Kevin Musisi

Dealing team

Super Thursday has finally arrived.

Today's data releases
  Key levels
09:30 Construction PMI   Support Resistance
12:00 BoE rate decision GBP/USD 1.3030 1.3660
12:30 Carney speaks GBP/EUR 1.1065 1.1560
12:30 Jobless claims  
Market overview

Super Thursday has finally arrived but before we delve into the details that lie ahead, it’s worth recapping on details from last night’s FOMC announcement. Policy was kept unchanged, with the Federal Funds Target Range kept at 1.00-1.25% and the process of balance sheet normalisation, which began in October, proceeding. The FOMC’s assessment of the economy and inflation remained more or less unchanged from September, although one notable change was the wording around economic activity, which the Fed judged had been rising at a ‘solid pace’ despite the hurricanes. Which we believe keeps a December rate hike to 1.25%-1.50% on track.

Overall, the announcement failed to yield any surprises which meant it took a back seat to speculation over the next Federal Reserve Chair. The Wall Street Journal overnight reported that Jerome Powell has been notified that he is President Trump’s nomination for the Fed Chair, with a formal announcement expected later this afternoon (3pm EST). Having received overwhelming support in the Senate when nominated as Fed Governor, his appointment to Fed Chair is expected to be fairly straightforward.

Back to our fair shores, the Bank of England is set to raise interest rates by 0.25% at noon today for the first time in 10 years! The probability of this happening stands at 91% as of this morning, according to Bloomberg surveys. All the while the economy is seeing some of the weakest growth rates in almost half a decade amid a planned exit from the European Union. The expected change by the central bank's monetary policy committee would reverse an August 2016 cut, taking the key lending rate back to 0.5%. There are a number of things to watch out for alongside the announcement. Firstly the voting pattern – expected to be 7-2 in favour of a raise. A deviation in the vote in either direction could have a significant impact on Sterling. Secondly the Governor’s press conference – will Mark Carney suggest this hike represents the first step in a gradual normalization cycle or will this be a ‘one and done’ hike? Assuming the hike actually happens! Finally, will the quarterly inflation report give investors more information on the BoE’s assessment of the UK economy through Brexit? With plenty to digest this afternoon be ready for the action to start at noon today.

Thought of the day

Over a decade ago, on 5th July 2007, was the last time the Bank of England raised interest rates. On 1st July 2007 smoking in England became banned in all public indoor places and on July 11th that year the 5th Harry Potter movie, ‘Harry Potter and the Order of the Phoenix’ was released. Doesn’t that just feels like a lifetime ago?! Over a decade later we arrive to today, 2nd Nov 2017, where the Bank of England is on now on track to raise rates again. A 25 bps rate rise is over 90% priced in but the market participants around the globe will be watching nonetheless. They are waiting in anticipation to see whether or not they will actually pull the trigger and they will listen closely to the MPC’s tone. Will it be dovish or hawkish? Either way Sterling volatility is likely. To place any orders ahead of the release or discuss your hedging options, call the dealing desk today on 0800 055 6339.

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