Morning Report: 22 January 2015

22nd January 2015 By: Admin

GBP Sterling ended yesterday’s trading relatively flat on the day following some mixed data from the UK. On the positive side, unemployment fell to 5.8%, its lowest level in many years and the jobless change figure came in better than expected. On the not so positive side, the Bank of England voted 9-0 in favour of maintaining interest rates at their current level of 0.5%. 2 members of the MPC committee, McCafferty and Weale changed their vote from the previous session, when they had voted for a rate hike. The Bank of England sees a “roughly even chance” of UK inflation temporarily dipping below zero in the 1st half of 2015, as well as highlighting the risks to the UK economy, if, as expected, the ECB announce today a quantitative easing programme. Data released today at 9.30am from the UK is the Public Sector Net Borrowing figure.

EUR The euro approached an 11-year low against the dollar during yesterday’s trading amid speculation the European Central Bank will today introduce large-scale bond purchases under quantitative easing. As mentioned, all eyes will be firmly on the outcome of the ECB policy meeting. The market is expecting the ECB to announce a comprehensive QE programme of €50bn per month until mid-2016, by which time the size of the ECB balance sheet will have reached €1tr. However, there is still a large degree of uncertainty heading into the meeting, with on-going speculation about the size and structure of the QE programme. Whatever the outcome, expect some large euro volatility.

USD Confirmation of euro weakness should bolster dollar strength, putting commodity prices under growing downside pressure in dollar terms. This would normally be bearish for the precious metals, especially gold, but we believe that an announcement of a larger-than-expected package would cause the US dollar and gold to break their inverse relationship and trade in tandem. Data out of the US yesterday showed new residential construction rose more than forecast in December, capping the best year since 2007 and signalling the industry will probably keep expanding this year. Initial jobless claims will be released from the US this afternoon at 1.30pm GMT.

CAD Major central banks around the world continue to surprise markets. The latest unexpected move came all the way from Canada, where the Bank of Canada suddenly lowered the target for its overnight rate by a quarter of a percentage point to 0.75%, the first time since 2009, responding to the recent precipitous decline in oil prices, which is estimated to be negative for the Canadian economic growth and underlying inflation. The central bank forecasts that oil prices will rebound slightly to $60 per barrel over the medium term, but policymakers believed that the negative effect of lower crude prices would be gradually mitigated by a robust US economy, a weaker Canadian Dollar, and the central bank’s monetary policy decision. The BoC sees the economy steadily recovering in the second half of the year, with real GDP growth averaging 2.1% this year and 2.4% in 2016. The economy is projected to return to full capacity around the end of 2016, a little later than was expected in October. On top of that, Canada’s wholesale sales unexpectedly declined in November, the first decrease in 11 months, driven by weaker sales of machinery and equipment. Wholesale shipments dropped 0.3% to C$54 billion, Statistics Canada reported, with machinery and equipment wholesalers posting a 2.8% fall in the reported month. Wholesale sales have risen 6.7% over the last 12 months, while the volume of sales, which strips out the impact of price changes, contracted by 0.3%.

UK news

  • FT. UK wages grow at fastest rate in 2 years: The recovery in Britain’s jobs market is at last starting to filter through to workers’ pay packets with wages growing at their fastest annual rate for two years.
  • FT. Bank of England MPC unanimous in holding interest rates: The Bank of England has taken a step back from raising interest rates, after the two dissenters on its nine-strong Monetary Policy Committee rallied behind the majority to continue the era of ultra-low borrowing costs.
  • Independent. Unemployment falls to six-year low of 1.9 million: Unemployment fell again in November to 5.8 per cent – its lowest level in more than six years.
  • Telegraph. EU vote will put British recovery ‘on the hook’ over Europe, warn top business bosses: Potential referendum on EU membership is will be a ‘re-run of the Scottish referendum’ for the UK’s business community, say chief executives.