Market News & Insights
14 September 2017

BOE Unlikely To Shift GBP Bias

It’s Bank of England Thursday and members of the MPC will find themselves between a rock and a hard place in discussions today but we don’t expect to see any change, or even any suggestion of change from today’s release on policy, more on that later. The USD was the outperformer in the currency world, the USD index rallied almost .9%, the greenback advancing against the EUR, GBP and JPY, amongst others. It was a somewhat mixed day between sessions. European indices traded lower through the day while in the US we saw stocks press record highs once again with three indices posting record closes. Overnight things were slightly choppier, some weaker Chinese trade data knocked sentiment and saw some early gains erased, while the Nikkei traded flat, and USDJPY remained in consolidation between 110.40 and 110.72. The euro continues to find itself under pressure, EURUSD dropped some 1.02% in trade yesterday, while EURGBP stayed around 7 weeks lows with support at .8985/90 area.

UK labour market figures paint a mixed picture of the UK economy as unemployment dropped to 4.35% while wage growth was at 2.1% vs 2.3% expected and facing off against the 2.9% inflation print. The headline unemployment figure looks great, however the real employment situation in the UK is not as rosy as the picture might paint. We’ve been saying it for over a year that more people are working, but for less money. There are over 1.7 million people employed on zero hour contracts, these feed into the headline data prints for unemployment but in reality many on these contracts would not even be earning a living wage due to heavily controlled hours and still entitled to assistance. Zero hour contracts are great for employers but leave employees exposed and distort the view of the labour market. Wage growth remain well below inflation and this will only widen increase the pressures faced by households. The BOE are not expected to act today, nor issue any change on guidance. We expect them to remain cautious and state they have the ability to act in either direction. Some comments yesterday from the BOE deputy governor Cunliffe suggested that they will act should banks Brexit plans create a financial risk. The vote will be interesting today but we do not expect too much change from last month’s BOE meeting, although the pound remains exposed to volatility to any shift in positioning by the BOE so we’ll watch the vote count rather than the rhetoric.

It was a strong day for USD yesterday, the greenback found some demand following news Trump had a productive meeting on tax, healthcare and security. Tax talk has really picked up in recent weeks as the US look to lower corporation tax and to repatriate trillions of dollars based overseas. As always the proof will be in the pudding here, there’s been a considerable amount of hot air from Trump and his plans have struggled to make much progress thus far but there have been plenty of other instructions. CPI inflation figures headline the US calendar, while not the Feds preferred inflation measure the reading still carries considerable weight and a slight rise expected in the headline reading to 1.8% from 1.7% may well help the greenback even higher. Once concerns is the expected drop in core inflation to 1.6% from 1.7% which may negate the headline reading but either way, if the USD is to have any recovery, bot reading must at least meet expectations.