Equity markets slid back sharply yesterday, with stock markets in Europe reversing all of their gains on Monday as concerns about rising trade tensions re-emerged as the US threatened China with increased tariffs of 25% on $200bn of goods, and the European growth story showed few signs of improving, after the latest July manufacturing PMI numbers reflected further pockets of weakness, particularly in Italy and Spain.
This weak trend continued in Asia overnight and is likely to carry on into Europe today with a lower open.
As expected the Federal Reserve kept interest rate policy unchanged, while doing nothing to alter market perceptions that it remained on autopilot to raise rates for the third time this year at next month’s September meeting.
The Bank of England has a decision to make today when it meets to decide on the outlook for the UK economy against a backdrop of a fairly decent rebound in economic activity in Q2.
The decision revolves around whether to raise or not to raise, that is the question? “Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous fortune, or to take arms against a sea of troubles”.
While the Bank of England monetary policy committee won’t necessarily have this Shakespeare quote in mind when they make their decision, they’ll certainly face a few slings and arrows whatever decision they make, which will ensure that today’s decision and press conference is likely to be very interesting indeed.
After several false starts over the last few years, Bank of England Governor Mark Carney may well finally deliver on something that he has always said was a possibility, but hasn’t as yet actually managed to do, and that’s lift rates away from 0.5%, where they have been for most of the last ten years.
This indecisiveness has earned him the moniker the “unreliable boyfriend” which he could go some way to shedding if he finally puckers up and actually delivers the rate rise he has promised on a variety of occasions since 2014.
On data grounds a rate rise would seem justified after the weakness in Q1 proved to be temporary, however the political uncertainty seen at the end of July, might cause some of the committee to lose their nerve. A failure to act would be a big surprise, given the lack of any pushback in the past few weeks on market expectations from UK policymakers in contrast to last April, when Bank of England governor Carney was quite vocal in stating that a rate rise wasn’t the done deal markets were pricing in.
No such warning has been forthcoming this time which would appear to suggest that a rate rise of 0.25%, to 0.75% will be announced later. The vote probably won’t be unanimous, as there could be one or two dissents, while a failure to act would in all likelihood trigger a sharp selloff in the pound, given the rate rise is already priced in.
We could well see some sterling weakness in any case if the bank is overly dovish in its guidance, or its inflation and growth outlook, as that might suggest that the Bank is not entirely convinced that a rate rise is the right thing to do, but it is important to note that if the MPC fails to deliver today it is unlikely to have the opportunity to do so again much before March next year.
One of the reasons for this is the small matter that this will be the last meeting for Ian McCafferty who voted to raise rates along with Michael Saunders and Chief economist Andrew Haldane at the last meeting. McCafferty’s replacement Jonathan Haskell appears to come across as slightly less disposed to tightening, which means that if the Bank fails to act today, it’s unlikely to do so this year, given that any Brexit denouement could come before its November meeting and inflation report.
One thing is certain, whatever the bank does today it is likely to be criticised, but with rates at such low levels already, a small adjustment higher is neither here nor there, and in terms of helping push down on inflationary pressures it has been necessary for quite some time.
It is also the lesser of two evils given how a weaker pound would put further upward pressure on inflation.
Before today’s meeting and inflation report we have the latest construction PMI report for July, which after a poor start to the year has been showing signs of an improvement in recent months. In June we saw a rise to 53.1, and today’s July number is expected to slip back a little to 52.8.
EURUSD – failed again at the trend line resistance at 1.1750 earlier this week and remains under pressure. While we remain below here the risk remains for a move lower, through 1.1620 towards 1.1500. If we do get a move through 1.1760 we could well see 1.1850, with support at 1.1620.
GBPUSD – while above support at the 1.3070 area the bias remains towards the upside with resistance at the highs this week at the 1.3175 area. The next target remains at the 1.3220 area while above 1.3070, on the back of the bullish reversal off the July lows. Below 1.3070 retargets 1.2960.
EURGBP – spiked up to 0.8938 earlier this week before drifting back. The big resistance remains up at the 0.8970 area, and while below still prefer a move back towards last week’s lows at 0.8860/70.
USDJPY – struggling to move above the 112.20 area for the moment but still has the potential to move up to the previous peaks at the 113.20 area. Support now comes in at the 111.70 area as well as the 50-day MA at 110.50.
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