The last day of the month was a favorable day for risk appetite with major stock indices closing on one of their best months of the year. In Europe stocks posted their second consecutive monthly advance of 1.8% with stocks holding around 5 months highs, closing the day itself up around .4% boosted by better than expected GDP data and indications the regions unemployment rate dropped to its lowest level in almost 9 years. This is probably the most reassuring sign coming from the region which has suffered greatly with high unemployment and is only now beginning to find its feet but with unemployment at 8.9% we are a long way from the US and UKs low levels.
In the US, we saw record highs posted once more with the S&P advancing higher once more, securing its best month since February, the final push helped by better earnings. GBP was as outperformer on the day, EURGBP breaking down lower once more and now sitting at major key support just above .8740. We’re unlikely to see a break below that today without a catalyst and with the BOE rate decision and the Inflation Report due out tomorrow, most will likely be watching that.
Sterling did get some help yesterday from comments from the EU’s Chief Brexit Negotiator, who highlighted he was keen to speed up negotiations. The USD was also firmer on the day, the greenback helped by some solid earnings reports and confidence data. Focus tomorrow will be on President Trump’s decision for the Fed Chair position. Overnight that risk positive tone carried over with the Nikkei up over 2% at one point before closing the day up 1.8%, while the Japanese yen has lost almost 1% over the last two trading sessions. With month end flows now out of the way we can focus back on major levels into the end of the week.
It is very difficult not to feel like the risk to GBP tomorrow is to the downside. Markets now fully expect a rate hike from the MPC tomorrow but that is about it, meaning the rate hike has been priced in the current GBP levels. Mark Carney already suggested recently that inflation has put a top in around the 3% level, posted in October. The 11% rally in GBPUSD this year also assisted by a near 6% rally against the euro from mid-summer should start the feed into the inflation figures helping ease the rising pressure.
The sterling rally assisted by a hawkish sounding Mark Carney and a shifting voting pattern in the MPC has certainly done its part without the BOE actually having to raise rates. The stronger GBP is certainly beneficial to the BOE’s inflation problem and given the rise in the pound’s value, some may decide that a rate hike is not actually required. This would certainly catch the market off guard and result in heavy selling of GBP across the board. As would any suggestion from the inflation report that the BOE expects inflation to move lower. Either way, raising interest rates in an economy heavily driven by debt is a dangerous game for the BOE, especially while Brexit negotiations continue to fail to impress. Markit manufacturing PMI data and some comets from the BOE’s Cunliffe in the House of Lords will be our focus for GBP today.
Looking stateside and the ADP employment report will be closely watched for any indication to Friday’s NFP figures. We’ll also have some data with the ISM manufacturing print due as well while the FOMC rate decision later this evening should pass without any fan fair given no change expected and no statement to follow.