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Tuesday 20 February 2018

Daily Market Update: Bank of England poised to act

Currency
Currency

Richard Ramsey

Last week on the currency markets the key theme was sterling weakness as financial markets continued to digest Brexit.

Over the last seven days the pound fell by 2.7% from $1.329 to $1.292 this morning. EUR/GBP is up 1.8% over the same time frame and is currently changing hands at 85.3p.  This compares with an opening rate of 83.8p last Monday. EUR/USD has moved lower over the last week with the dollar boosted by encouraging economic data last week.  EUR/USD opens this morning at $1.102 down from $1.114 last Monday. On the equity markets, the UK’s FTSE 250, which is a better barometer of the UK economy than the FTSE 100, fell by 1.7% last week with the Euro Stoxx down 1.6% over the same period.  Strong US employment figures on Friday triggered a relief rally on equity markets with the Euro Stoxx up over 2% and the S&P 500 up 1.5% on Friday. This equity rally has continued in early trading today with the Euro Stoxx up over 1%.   

The US labour market bounced back after May’s disappointment. Jobs rose by a staggering 287,000 last month, which was over 100k above what analysts had pencilled in.  However, rather than herald a booming economy this largely made up for May’s anaemic 11,000 increase. It brings the job creation total for the first half of this year to just over 1 million.  Not bad, but 300,000 short of where it was this time last year. What’s more wages have stayed relatively still. Wage growth is now 2.6%, up from 2% a year ago. Better, but not enough to stoke fears of inflation or trigger interest rate rises from the Fed.

There is a dearth of economic data releases due today. Financial markets will be listening to Fed policymaker Esther George later this afternoon. Following Friday’s encouraging labour market figures   George will be speaking on the US economy. We also have JP Morgan Chase kicking off the second-quarter earnings reporting season this week. Analysts expect Q2 earnings to be subdued with the interest rate environment making it more difficult for banks’ profitability. 

There should be plenty of interesting developments later in the week. The Bank of England meets for its first MPC meeting following the EU referendum result and we can expect to see some action on Thursday. Last week at least eight UK property funds stopped investors withdrawing money. Yesterday’s Sunday Telegraph reported that the Bank of England is considering curbs on withdrawals from property investment funds. Perhaps more significantly will be a move on interest rates. In late June Governor Mark Carney said “the economic outlook has deteriorated and some monetary policy easing will probably be required over the summer”. The expectation is for the MPC to cut its Bank Rate from 0.5% to 0.25% on Thursday. Markets have assigned a 75% probability of such an outcome as the BoE seeks to provide more stimuli ahead of a potential UK recession.  This would be the first interest rate cut since March 2009. Such a move will provide a further boost for equities but will see sterling weaken further.

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