Market Report - 02/11/2023
City prepares for BOE rate decision; Volatility expected to continue
As markets prepare for the Bank of England meeting shortly, the period of extended volatility is widely expected to continue. The BoE is predicted to leave UK interest rates on hold today, at its latest monetary policy committee (MPC) meeting.
According to Guardian Business Live, experts in the City are increasingly confident that Andrew Bailey and the MPC will leave the base rate at 5.25% today, its highest level in 15 years, extending the pause which began in September – whilst also emphasizing the ‘longer for higher’ stance that the bank seems to have undertaken.
However, the vote may not be unanimous, with several of the nine MPC policymakers expected to vote to increase rates further. Those hawkish members of the committee are concerned that even higher borrowing costs are needed to cool inflationary pressures. The two notoriously dovish members of the MPC, Swati Dhingra and Silvana Tenreyro could possibly vote for a rate cut, however.
The majority though, seem likely to stick to the view that the BoE should maintain borrowing costs at the current elevated level for long enough to push inflation down.
With most of the focus being around whether the BoE will leave rates unchanged or not, arguably what is more important when looking at the reaction of financial markets will be the minutes released by the MPC and the forward guidance given by Andrew Bailey in his post-interest rate decision press conference.
The GBP could be tipped to win back some ground against the EUR in the wake of today's Bank of England policy decision, looking to retrace the 2% losses sustained over the past two months.
The UK's CPI inflation rate in September read at 6.7% year-on-year, which was above consensus estimates, primarily as a result of rising fuel prices. Eurozone CPI inflation meanwhile fell to 2.9% y/y in October.
For the Pound to remain supported against the Euro today, the MPC must avoid sending a 'dovish' signal that it could entertain interest rate cuts sooner than current market expectations. Any indication that we have reached ‘peak’ interest rates, and that further hikes are unlikely – could see the GBP sold off yet again, making further losses for GBP pairs a real possibility.
There is a particular risk that the Bank's Monetary Policy Report reveals softer inflation and growth forecasts than the market is currently expecting, which would act as a signal rates can come down faster in future months. But with inflation still elevated and the UK labour market still tight, such a signal could risk bringing the Bank's credibility into question, something it will be keen to avoid.
Looking at the USD, the FOMC held the policy rate steady at 5.25%-5.5% as was widely expected on Wednesday evening. Fed Chairman Jerome Powell did not rule out another rate hike in December but failed to convince markets, as the dollar lost around 0.3% of its daily gains in the aftermath. The benchmark 10-year US Treasury bond yield fell nearly 4% on the day and the US Dollar (USD) weakened against its major rivals, allowing GBP/USD to turn north – back towards 1.22.
On the economic calendar for the remainder of the week, investors and analysts will be keeping a keen eye on the all-important Non-farm Payroll data, which is due to be released tomorrow. The previous reading was 336k for the month of October, with the forecast for tomorrow’s data standing at 180k. If this comes to fruition, there could be further losses for the USD to endure.