Wednesday 25 April 2018

Daily Market Update: Central Banks take centre stage yesterday as the Brexit aftermath rumbles on

Governor of the Bank of England Mark Carney gives a press conference at the Bank of England in the City of London. Photo: PA Wire
Governor of the Bank of England Mark Carney gives a press conference at the Bank of England in the City of London. Photo: PA Wire

Richard Ramsey

Yesterday was month end, quarter end and half year end but the currencies were driven by central banks.

Bank Of England Governor, Mark Carney in a speech yesterday, gave a clear indication that the Bank of England may cut policy rates over the next few months and is primed to sanction additional easing measures:’ The economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.’ GBPUSD sold off heavily from around 1.3430 to down below 1.3220, similarly in EURGBP we saw Sterling weaker, moving from around 0.8270 to above 0.8380. Before yesterday’s Carney speech the GBP rates market had not really embraced the idea of further rate cuts in the UK. Given that yesterday saw the lowest monthly close in GBPUSD in over 30 years it is not surprising that there is not a lot of significant technical levels to monitor other than the psychological ones at 1.30 and 1.25.

Digging a bit deeper into Governor Carney’s comments, the prepared remarks were fairly vague on specifics of what measures the Bank would consider, the Governor stressed in his Q&A that the Bank has plenty of options. “When it comes to monetary policy, there are a range of potential easing options we have, it’s not just about bank rate and it’s not just about what this institution did in the last crisis.” Specifically opening up a discussion of non-standard measures including those that were not used in the aftermath of the financial crisis leaves the door wide open for the Bank of England to take action that can support gilts and keep US Treasuries supported purely on yield differential.

Also late in the European session, Bloomberg reported that some Governing Council members want to change the allocation of purchase from the size of a nation’s economy toward one more in line with outstanding debt.  Technically, this is not an increase in asset purchases but the market interpreted it quite dovishly with EUR selling off just over a big figure against the dollar from a high of 1.1155 down to 1.1024. The next major support level in EURUSD is last week’s post-Brexit low of 1.0913.

With all this central bank noise equities continued to motor higher yesterday.  The FTSE 100 actually closed at year to date highs although the FTSE 250 is still well off the pre-Brexit highs.  On the other side of the Atlantic the Standard and Poor’s 500 Index has now retraced almost the entire Brexit selloff and notched its highest ever quarterly close (the highest monthly close was last May at 2107.39).

For the day ahead, June PMI manufacturing indexes are released throughout Europe with revisions to previous June estimates for France, Germany, and the Euro-area are released alongside fresh figures in Norway, Sweden, Switzerland, Italy, Ireland and Spain. Also at 10am May’s unemployment figures are set for release. In the UK we also get the UK manufacturing PMI at 9.30am which may edge below the expansion-contraction threshold as the Brexit referendum weighs on confidence and consequently may put a dent in order-books. Finally in the UK we get Unit labour costs, a still-neglected piece of economic data by the City, despite policymakers regularly referencing its importance. The quarterly frequency of the data doesn’t help – markets seemingly prefer to be guided by the monthly Average Weekly Earnings data in the main labour market report. The report will be released at 9.30am.

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