Morning Report: 3 February 2017

3rd February 2017 By: Ranko Berich

GBP Sterling fell sharply yesterday, as the Bank of England used their Quarterly Inflation Report to squash any burgeoning expectations of an interest rate hike. Markets had begun speculating that the BoE could become the first major central bank to follow the US Federal Reserve’s lead in tightening monetary policy, on the back of a run of strong economic data and rising inflation indicators. However, as the central bank acknowledged, consumer spending has been the main catalyst of economic growth in the UK after the Brexit referendum vote, something the central bank had underestimated. Therefore, the BoE may be concerned that an increase in interest rates could undermine consumer spending and, thus, they would rather hold the current monetary policy to maintain growth momentum, for the time being. The Services Purchasing Managers Index is published today at 9.30 GMT.

EUR The euro is on the back foot this morning, after European Central Bank Executive Board member, Peter Praet, stated that the “firming recovery in the euro area is not yet sufficiently robust to ensure a self-sustained convergence of inflation rates closer to 2 percent”. The euro had been rising consistently over recent days against the US dollar, with markets still digesting both US President Donald Trump and his senior trade adviser Peter Navarro’s claims that the single currency has been artificially undervalued. Various services Purchasing Manager Indices will be released across the morning. Retail sales data is released at 10.00 GMT.

USD The US dollar is higher against all G10 currencies this morning, ahead of today’s labour market data release. Earlier this week, the Federal Reserve held interest rates, and failed to hint at any potential further tightening in the near future, but a good read in the employment figures today could spark fresh market optimism. In particular, the data surrounding wage growth are becoming increasingly important, since higher expected inflation could undermine other critical areas such as retail sales if wages do not offset the increases in prices. The labour market data will be released at 13.30 GMT.

CAD The loonie has largely held on to its recent run of gains against USD, despite the greenbacks general fightback yesterday, with the rally in crude oil prices since mid-January providing support to CAD. Interestingly, crude oil prices keep posting higher lows, which suggest further technical upside on the horizon. However, oil inventories are increasing again at a dangerous pace due to higher production in the US, which is offsetting the OPEC’s production cut and risking a new correction in prices. No data will be released today.

UK News

How Bank of England upgraded forecast without changing view on inflation. Bank believes wages will remain low even with stronger demand. In November, the Bank of England said the resilience of the British economy after the vote for Brexit should not be over-interpreted and suggested that pain had merely been deferred. On Thursday, with surveys continuing to show little sign of a slowdown, it conceded that stronger demand is likely to persist. As a result, the BoE significantly upgraded its economic forecasts, while leaving its inflation forecast and interest rate policy on hold.

Bank of England, ramping up growth forecast, in no mood for rate hike
. The Bank of England made its latest sharp increase to forecasts for British economic growth in 2017 on Thursday, but appeared in no rush to raise interest rates, warning of “twists and turns” on the road out of the European Union. There were signs of a partial split as some of the BoE’s nine rate-setters “moved a little closer” to their limits for tolerating an expected overshoot of inflation above their 2 percent goal. But the general message from the BoE was that it remained comfortable with its record low rates even as the pound’s slide since June’s Brexit vote pushes prices up quickly.