02 Jul 2020
Market Brief - Bank of England set to hold
The pound inched higher yesterday afternoon as news broke Theresa May had managed to avoid a Tory rebellion and avoid defeat in Parliament over her flagship Brexit bill.
|Today's data releases||Key levels|
|12:30||UK Bank of England rate decision||Support
|21:05||UK Bank of England Carney speaks||GBP/USD||1.3040
The pound inched higher yesterday afternoon as news broke Theresa May had managed to avoid a Tory rebellion and avoid defeat in Parliament over her flagship Brexit bill. With a win of 319 votes to 303, the government squeezed through the crucial Brexit vote after assuring Tory rebels they would be given time to debate in the Commons if the government failed to reach a deal with the EU. Not only did Ms May manage to satisfy pro-European MP Dominic Grieve through the compromise, she also managed to please the pro-Brexit faction who were happy the government stood its ground. Although this was an important win for the PM it is only the first of several bills she has to get passed and it is easy to forget that her biggest challenge will be negotiating with the EU as opposed to rebels her own party – who have insisted that supporting the PM this time around did not mean they would necessarily do so moving forward. Investors clearly weren’t impressed as the pound only benefitted briefly before again being sold this morning hitting a fresh low of 1.3125 against the USD. Market participants will now turn their attention to the Bank of England's interest rate decision today where rates are expected to remain unchanged.
The increasing trade disputes between the Trump administration and the rest of the world are starting to raise risks to the global economic outlook according to the world’s most powerful central bankers. Speaking at European Central Bank conference in Sintra, Federal Reserve Chairman Powell specifically issued concern over a decline in business investment in the US, while this sentiment was echoed by BOJ’s Kuroda, ECB’s Draghi and the RBA’s Lowe. Other notable remarks from the conference include Federal Reserve Chairman Jerome Powell repeating the case he’s laid out for raising interest rates to keep the US on a sustainable path, citing broad support among his colleagues. His comments come a week after the Fed raised rates for the second time this year in response to accelerating growth and falling unemployment. The median projection from Fed officials for the number of rate hikes this year also rose to four from three.
There were also a number of ECB comments, with Bank of France Governor Francois Villeroy de Galhau saying in a letter released Wednesday that the first ECB interest-rate rise “could come as of the summer of 2019”. This sent EURUSD higher, with Villeroy later specifying that his comments were in line with the Governing Council’s rate guidance issued after its June 14 meeting. Governing Council member Ewald Nowotny highlighted that monetary policy divergence is helping to weaken the currency against the dollar which saw EUR fall lower closing at 1.1577 for the day.
The day ahead
The Bank of England’s MPC decision is due 12:00pm today. We firmly expect the Bank rate will be held at 0.50%, albeit with McCafferty and Saunders again dissenting with calls for a rate hike (i.e. a 7-2 vote). A unanimous 9-0 to leave the stock of QE unchanged is almost certain. Previously, the Bank put its rate tightening plans on ice in May after a poor Q1 GDP print of +0.1% (QoQ). Though put down to temporary factors by the MPC, it held off from hiking rates in May to see this confirmed in subsequent months. However, signs of a Q2 bounce back have not been overly convincing thus far, which is why we do not expect a hike until November 2018. Still, there is a possibility that the minutes of the meeting (also published at 12:00pm) hint that an August hike is possible. This would represent a more hawkish outcome than markets expect and would likely see sterling appreciate and gilts sold off. A press conference will not follow today’s decision, though Governor Carney will be speaking later at the annual Mansion House banquet at 9:15pm.
Thought of the day
Platinum-selling performer and philanthropist Akon wants to build his own city in Senegal and launch his own cryptocurrency as the central form of exchange. Speaking on Monday, at the Cannes Lions Festival Akon discussed his plans for AKoin, a blockchain technology and cryptocurrency that could be ‘the saviour for Africa in many ways’ because of its high security factor. The original crypto coin has been under some serious pressure of late moving 11% in 2 weeks after Bithumb, South Korea’s biggest exchange, was hacked! (Quite ironic given Akon’s comment on Monday).
Sterling has also been suffering from a similar fate. The Pound is now 9% lower than the post-Brexit high of 1.4375, having moved almost 9% lower against the Dollar in only two months. This definitely caught some off guard and with the trade war spats ongoing and Theresa May’s leadership continuing to be questioned, where will GBPUSD be trading in another two months’ time? To discuss ways of outperforming current levels or forecasts for the rest of 2018 and beyond please give your Investec dealer a call on 0800 055 6339.