Thursday, January 30, 2020

Will the BoE cut rates at Governor Mark Carney’s final meeting?

Tags
  • Euro
  • Pound
  • Bank of England

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Analysts’ Pick: Will the BoE cut rates at Governor Mark Carney’s final meeting?

  • BoE may continue to keep rates unchanged as January’s economic data in the UK signals that the British economy may be recovering
  • Sterling will probably advance as a result, as financial markets are still mixed on what to expect from the BoE
  • But BoE is likely to continue its dovish bias if it leaves interest rates unchanged

The BoE is set to make its decision on monetary policy at 8pm (GMT +8) today. But investor sentiment looks to be mixed on whether there will be a rate cut from the central bank at the end of today's meeting. Overnight Index Swaps (OIS) indicate that the financial markets are only pricing in a 45.6% probability for a rate cut, down from 75.6% two weeks ago.

Implied probabilities rose to 45.6% after better-than-expected PMI in the UK

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While speculation has grown that the BoE will cut rates in today's meeting, the British economy has shown signs of rebounding in January after the December general elections in which the Conservatives regained their majority in parliament. PMI reports by Markit has shown that the UK's manufacturing sector is recovering, with preliminary estimates placing the sectors' PMI reading at 49.8 in January from 47.5 in December. The services sector also came out strong in January, with PMI reaching 52.9 from 50.0 in December. A business sentiment survey conducted by Lloyds jumped to 23 in January versus 10 in December, implying that business sentiment in the UK has improved since uncertainty surrounding Brexit has lessened. The better-than-expected PMI data and possibly improving business sentiment is likely to delay the BoE's rate cut to later in the year, which will probably drive the sterling higher on the release of the monetary policy decision.

Economic data for January signals that the UK economy may be on track for recovery

Indicator

Actual

Consensus

Prior

Jan Markit Manufacturing PMI (P)

49.8

48.8

47.5

Jan Markit Services PMI (P)

52.9

51.1

50.0

Jan Markit Composite PMI

52.4

50.7

49.3

Nationwide House Price MoM

0.5%

0.2%

0.1%

Nationwide House Price YoY

1.9%

1.5%

1.4%

Jan Lloyds Business Barometer

23

-

10

*Source: Bloomberg

But the central bank is unlikely to drop its dovish tone since the available data that covers the period following the December 12th elections is still limited. Monetary Policy Committee (MPC) members Michael Saunders and Jonathan Haskel will likely continue to keep their dovish bias and call for a 25bps cut while other members are likely to vote to leave rates unchanged. This will bring the MPCs vote to 7-2 in favor of leaving interest rates unchanged. The sterling should fall slightly as a result.

BoE MPC members are currently titled towards a more dovish bias

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The BoE's forecasts should also remain mostly the same or within expectations. GDP forecasts for Q4 2019 will likely show that the British economy stagnated, while 2020's quarterly GDP forecasts should still continue to show the economy in the UK stabilising through 2020 thanks to reduced risk in the global economy and reduced uncertainty on Brexit. But downside risks such as the coronavirus outbreak in China and a possibility for the UK to exit the EU at the end of 2020 without a trade deal in place will likely be cited.

Our base case scenario implies that there will be no rate cut from the BoE, while BoE officials are likely to maintain its dovish bias. As a result, sterling is expected to strengthen initially before falling slightly, with the EUR/GBP cross falling towards 0.8410, before recovering slightly towards 0.8440.

 

Scenario

Effect on EUR/GBP

1

BoE keeps rates unchanged; continues slightly dovish stance

Falls to 0.8410 before recovering slightly towards 0.8440

2

BoE cuts interest rates by 25bps; adopts a more neutral tone

Rises towards 0.8485

3

BoE cuts interest rates by 25bps; continues slightly dovish stance

Rises past 0.8485 towards 0.8509

*Source: ADSS

Technical Analysis:

EUR/GBP

The market remains cautious ahead of the BoE’s monetary policy meeting later this afternoon as there is no clear indication on whether the central bank is likely to cut rates or leave rates unchanged. RSI confirms this and EUR/GBP will likely continue to trade within the 0.8440 to 0.8470 range as a result. Bulls and bears will likely be in a close fight ahead of the BoE’s decision and continue to trade within the 20-day and 50-day moving averages ahead of the decision. The bears may be able to drag the currency pair lower as it looks more likely that the BoE keeps interest rates unchanged, expect bears to pull EUR/GBP towards 0.8410’s level as a result. But if the BoE cut interest rates, then the bulls will likely charge forward, pushing the EUR/GBP cross above the 50-day moving average and gain momentum to rise towards 0.8485’s level.

Support: 0.8440 / 0.8410 / 0.8377

Resistance: 0.8470 / 0.8485 / 0.8509

EUR/GBP Chart (H4)

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