Europe to open higher before the Bank of England meeting

CMC Markets

US stocks closed in the green on Wednesday, albeit off session highs after the Federal Reserve chose not to hike interest rates. The decision was matched with cautious commentary on the global outlook and US inflation prospects.

The implied number of rate hikes this year according to the Fed’s “dot plot” dropping to two from four was welcomed by markets. Two hikes this year is closer to consensus amongst economists but still more than is being priced by markets.

European markets finished mixed before the Fed decision but remained close to two-month highs thanks to a pickup in the price of oil. The continued strength of oil overnight, supported by a producer meeting organised for next month, combined with the more dovish Fed is setting European markets up for a higher open.

UK stocks outperformed Europe thanks in part to a well-received budget that contained a few more giveaways and less tax hikes than might have been expected given the lower forecasts for economic growth from the OBR. There were some exceptions with shares of sugar-maker Tate & Lyle as well as soft drinks makers Britvic and AG Barr dropping after the surprise announcement of a sugar levy.

The British pound was resilient to the lowered OBR forecasts after average earnings grew faster than expected in the three months through January. If anything, the Fed decision to hold-off on raising rates in March has put back even further the time horizon in which the Bank of England could start to normalise monetary policy. Expectations are for another 0-0-9 vote to keep interest rates unchanged. It’s hard to imagine accompanying BOE meeting minutes turning more hawkish before the June Brexit vote given Governor Mark Carney’s warnings about the risks of uncertainty.

The US dollar snapped a three day winning streak to end lower after the Fed’s commentary, with gold and the euro revering a string of losses to finish higher. The apparent incapacity of the Fed to raise rates, even though other central banks are still easing policy, net net means a convergence of US monetary policy with the rest of the world.

EURUSD – The euro has bounced perfectly off the top of its former trading range, marked by the December 16 high. The bounce has led to a higher high beyond the March 10 peak, increasing the odds of a re-test of the February peak, just shy of 1.14.

GBPUSD – Sterling made a fakeout below 1.41 before rebounding and closing higher on Wednesday. The medium term trend remains to the downside while below 1.4440.

EURGBP – Last week’s false break below 0.77 has seen the euro-sterling pair put in a new high but the price has stalled at what could form the right shoulder of a head and shoulders pattern.

USDJPY – Dollar-yen remains stuck in a 112-114 trading range, with a down-sloping upper trendline connecting the peaks from Feb 16, March 2 and 10. A close above 1.1480 would be needed to confirm a double bottom.

Equity market calls

FTSE100: to open 15 points higher at 6,190

DAX: to open 39 points higher at 10,022

CAC40: to open 11 points higher at 4,474


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