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Is Bank Of England Ready For A Rate Cut?

By Kathy LienCurrenciesJan 29, 2020 03:30PM ET
www.investing.com/analysis/is-bank-of-england-ready-for-a-rate-cut-200502853
Is Bank Of England Ready For A Rate Cut?
By Kathy Lien   |  Jan 29, 2020 03:30PM ET
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Daily FX Market Roundup 01.29.20

Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

The Federal Reserve’s monetary policy announcement proved to be marginally negative for the dollar. The central bank raised its IOER rate but described the move as a small technical adjustment. Chairman Powell highlighted the ongoing strength in the economy but also expressed concerns about uncertainties including the virus. Most importantly, the central bank made it clear it is not pleased with low inflation and wants prices to move toward the bank's goal, which is not a ceiling. On liquidity and repos, he admitted that repo may play a role as a backstop to support rate control but the aim is liquidity and they are prepared to adjust the amount as needed. For the time being, repo operations will last until at least April. With updates to their economic projections expected at the next meeting in March, no surprises were expected. Instead, the more market-moving event for the greenback will be tomorrow’s U.S. Q4 GDP report. Growth is expected to slow but with retail sales and trade improving at the end of the year, growth could surprise to the upside.

Meanwhile, it was also no surprise that the market shrugged off Australia’s stronger consumer price report. Inflation is a nominal concern when we have coronavirus posing such a major risk to regional growth. New Zealand trade numbers are due for release this evening and the sharp decline in the manufacturing signals weakness that could take NZD/USD to fresh 7 week lows.

The most market-moving event on this week’s calendar will be Thursday’s Bank of England monetary policy announcement. The BoE is closer than ever to lowering interest rates. On January 17, investors saw a 70% chance of easing this month but after stronger PMIs, the market thinks the odds are closer to 45%. Unfortunately those odds do not reflect the impact of the coronavirus so someone is bound to be surprised. Back in December, two members of the policy-making body voted for a quarter-point rate cut and there’s a very good chance that a third or even fourth member could follow this month. There’s also a small but serious possibility of an immediate rate cut. At its last meeting, the central bank also lowered its growth forecast and its outlook is probably even weaker with coronavirus.

Since the last meeting, we’ve seen both improvements and deterioration in the UK economy. As shown in the table below, consumer spending fell despite holiday discounting, inflationary pressures eased and wage growth stagnated. Up until last week, most UK economic reports surprised to the downside – hence the surge in rate-cut expectations – but on Friday, January PMIs were released and they blew out expectations, coming in firmer than anticipated and in one fell swoop the chance of easing plunged.

This will also be Governor Carney’s very last meeting before he is replaced by Andrew Bailey. Could his swansong be a rate cut or will he choose to leave this key decision to his successor in March. We think he’ll wait but in lieu of easing, his tone should be unquestionably dovish. So between a strong possibility of more MPC members voting in favor of a rate cut and dovish comments from Governor Carney, we expect GBP to weaken before and after the rate decision against the U.S. dollar and euro. GBP/USD could easily slip to 1.2950 before the policy announcement.

GBP Data Points
GBP Data Points
Is Bank Of England Ready For A Rate Cut?
 

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Is Bank Of England Ready For A Rate Cut?

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Comments (13)
Pattie Jabbaz
Pattie Jabbaz Jan 31, 2020 10:36PM ET
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Not before gbp/usd be OVER and Holds over 1,3325 and perhaps would be over 1,45 and that would be the monent for a rate cut
Cristian cristan
Cristian cristan Jan 31, 2020 2:23AM ET
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as it turns out, don't give the best forecasts. you make mistakes, often you have made mistakes, maybe intentional.
Mariel Lang
Mariel Lang Jan 31, 2020 2:23AM ET
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It was like completely the opposite
Lavarro Taylor
Lavarro Taylor Jan 30, 2020 10:52PM ET
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Thank you.
Phil Poon
Phil Poon Jan 30, 2020 9:11AM ET
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useless as always
Sinesipo Sani
Sinesipo Sani Jan 30, 2020 2:26AM ET
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Thanks Kathy
Aleksander Dashi
Aleksander Dashi Jan 29, 2020 6:24PM ET
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just perfect analysis. keep going
Hamza Lewal
Hamza Lewal Jan 29, 2020 6:10PM ET
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thanks Kathy, on my perspective GBP is trying to push it place back to 2016 area with aim to go down for this year.
Jude Especkerman
Jude Especkerman Jan 29, 2020 4:56PM ET
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Thanks Kathy Lien
Daniel Msuya
Daniel Msuya Jan 29, 2020 4:54PM ET
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i love ur books and analysis
Strela Fxxx
Strela Fxxx Jan 29, 2020 4:19PM ET
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Brexit will cause great damage to the European economy?
 
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