Market Report - 01/02/2024
Bank rate remains at 16 year high ; Markets await Non Farm Payrolls
In what has been an incredibly busy week in the markets, In a rare event, the Bank of England decided to keep interest rates the same in a three way split-decision. During the MPC meeting at 12pm, it was announced that the Bank Rate will remain at 5.25%, a 16-year high.
That will disappoint borrowers, such as mortgage holders, hoping to see a drop in borrowing costs today. However, this was exactly the outcome that the City was expecting. With forecasts all suggesting there was going to be no action taken from the Bank of England. Interestingly enough, it was not a unanimous decision with two members of the Bank’s Monetary Policy Committee preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%.
According to the Bank;
“Six members (Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Huw Pill and Dave Ramsden) voted in favour of the proposition, whilst three members voted against the proposition. Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member (Swati Dhingra) preferred to reduce Bank Rate by 0.25 percentage points, to 5%.”
In the immediate aftermath and following press conference, Andrew Bailey confirmed he is confident that inflation will hit its target of 2% in the second quarter of this year, down from 4% in December. However, he also noted that this is not expected to be long lasting and revealed that inflation is now predicted to increase yet again in the second half of the year. Expectation are that inflation will increase to around 2.75% at the end of the year.
The FX markets reaction to this Bank of England decision has been relatively subdued, with no drastic volatility on any of the major pairs. GBP/EUR had traded down slightly on the day, in the quiet period before the MPC vote; and only managed a slight retracement back to 1.1715 following the release. We have seen a daily high of 1.1743 and a low of 1.1682. With a lack of resounding EU or GBP data due out for the rest of the day, it could be expected that we see some stability between now and close of business on Thursday.
On the euro, it was announced this morning that Eurozone manufacturing had seen a downturn in January as Red Sea disruption leads to supply delays. The EU’s factory sector has once again contracted, but at a slower rate than previously seen as disruption in the red sea, caused by the Houthi rebels causes supplier delays. Data provider S&P Global Insight reports that the slump in the eurozone’s manufacturing sector eased in January, with factory output and new orders declining at their softest rates since last April.
As well as that, Eurozone inflation drops to 2.8%, made evident by the CPI release this morning.
Inflation on the continent has fallen, partially unravelling the inflationary gain seen in December. Statistics body Eurostat reports that euro area annual inflation is expected to be 2.8% in January 2024, down from 2.9% in December.
Moving across the pond, it is also a busy period for the USD; Following last night’s meeting: Fed kept rates unchanged, but his comments were deemed relatively hawkish by the end of the press conference.
Starting his speech, Powell came across surprisingly dovish. He acknowledged a lot of progress has been done on inflation, and he said the FOMC just needs continued evidence (not better, just equally good data) on disinflation to start cutting rates. But then the cold shower: when explicitly asked about how many months of good data the FOMC needs to see to start cutting, he was clear. March is not the base case to start the cutting cycle!
This means the Fed will be very patient in cutting rates, unless of course the labour market starts showing more signs of cracks.
GBP/USD also struggled to find its feet and re-test levels north of 1.27 which were noted yesterday, following the Bank of England meeting. In the aftermath of an underwhelming US ADP payroll report, GBP/USD had rallied to 1.2745 yesterday afternoon, as markets awaited to FOMC rate hike decision – which was announced at 7pm last night.
As of now, GBP/USD continues to trade near the bottom of it’s current range around 1.2655. Further volatility is likely when we have Employment/Unemployment data released later on, before the all-important Nonfarm Payroll data tomorrow afternoon.