Yesterday’s Bank of England meeting ably summarized the paucity of options that a central bank has at its disposal while the country it is responsible for goes through an immense political change. Our expectations for the meeting were largely met – lower growth estimates, weaker inflation expectations and warnings around the impact of Brexit were all there – and, after an initial slip, sterling rallied well as the Bank emphasised that the next move in rates was still likely to be higher.
The Bank currently has the odds of a recession in the UK at 1 in 4 even if a deal between the UK and EU is agreed before March 29. The global picture has certainly softened since the Bank’s previous statement in November and that is more of a drain on sentiment than Brexit at the moment.
Sterling will shift its focus away from the Bank today and back on to Brexit. Yesterday saw the government confirm its intention to hold another parliamentary vote on Brexit on February 14. It is unclear at the moment whether this will be another ‘meaningful vote’ on the deal but we will at least be in store for more amendments.
The news that Donald Tusk told Theresa May yesterday in Brussels that Jeremy Corbyn’s plan may offer more positivity into the Brexit agreement is an interesting development and limits the likelihood of a no-deal outcome. Corbyn’s letter indicated that he would back a deal if it delivered a permanent customs union, “close alignment” with the single market, protections for workers’ rights, participation in EU agencies and funding programmes, and agreements on future security arrangements.
As for rates, 1.30 is seen as the centre of gravity in GBPUSD at the moment and we’ll need a meaningful change in the politics or another run of important data – next week’s inflation and retail news for example – for it to shift away from that more permanently.
AUD: Another Day, Another Weakness
The Reserve Bank of Australia cut its GDP growth forecast for the year through to June to 2.5% from 3.25% whilst also cutting its inflation forecast to 2.0% from 2.2% for 2019 and to 2.1% from 2.3% for 2020. We’re getting close to levels therefore wherein the central bank’s own forecast show it missing its own targets on inflation, prompting the chance of a cut in interest rates in the near future.
The key to all of this is still China and the genesis of any further slowdown for the world’s 2nd largest economy in the world.
USD: Trade Concerns
President Donald Trump said yesterday that he won’t meet Chinese President Xi Jinping before the March 1 deadline to prevent further tariffs on Chinese goods and send the trade war into a new painful phase. Trump told reporters last month that he planned to meet Xi in last February, adding that there was a “good chance” of striking a deal but yesterday seemed less ready to commit to a meeting between the two.
It is not our central scenario that we get a deal on tariffs but more another extension of the current truce. News of such will likely buoy riskier currencies and send the dollar lower.