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November 2017

Bank of England rate decision grips markets

Published: Thursday 02 November 2017

  • Bank of England rate decision grips markets 
  • UK manufacturing stronger in October
  • Federal Reserve holds rates at 1.25% as expected
By Joe De Berniere
 
 
Good times for the Pound
 
The Pound had another good day yesterday. GBPUSD broke past 1.33 for the first time in over two weeks and GBPEUR is at the highest since mid-June of 1.1440. UK manufacturing figures for October were largely responsible for this, as they beat expectations of 55.8 with 56.3. This suggests the sector is continuing to experience growth, in spite of continued uncertainties relating to Brexit and only adds further pressure to the Bank of England’s (BoE) Monetary Policy Committee (MPC) members to vote for a hike today. 
 
The Pound has largely been supported in recent days, thanks to market expectations that the BoE will raise rates today for the first time in 10 years. As a number of policymakers have signalled hawkish intent, interest rates look set to finally rise from their current low of 0.25% to 0.5%. However, with the impact of a hike already largely priced into the Pound, its upside potential is relatively narrow, unless policymakers prove more hawkish than expected. What matters is what the BoE says about future interest rate rises and the tone they adopt. Is this a one-off, or the start of a soft cycle of rate rises? Equally, the case for a rate hike is still far from certain, given the sluggish nature of wage growth and signs that rising inflation is already squeezing consumers. No hike today will certainly see Sterling drop sharply. No mention of further hikes for 2018 should also cause Sterling weakness.  
 
Federal Reserve keeps rates unchanged and awaits new Chairman
 
In other news, the US kept their interest rates on hold, as expected, at 1.25%, but reinforced expectations of a December rate hike by subtly upgrading their assessment of the US economy. Trump also plans to nominate the Federal Reserve Chairman and successor to Yellen, as Jerome Powell. If approved by the Senate, Powell will bring continuity on rates, and sympathy with deregulation.
 
What to look out for today…
 
The focus for markets today will be on the BoE’s interest rate decision, the UK inflation report, and UK Construction Purchasing Managers’ Index (PMI), just released this morning. The latest construction figures showed a rise in activity for October, thanks to increased housebuilding, but, following last month’s disappointing results and a further decline in commercial and civil engineering activity, confidence in the UK construction sector has fallen to a near five-year low.
 
This will be followed by US unemployment data in the afternoon, which is always analysed closely as a key indicator of the strength of the US economy.
#ThursdayThoughts
 
Where do animals go when their tails fall off?
The retail store.
 
How does a train eat?
It goes, chew chew.
 
What did the buffalo say to his son when he left for college?
Bison.

Today's Major Economic Releases

Market BST Data/Event Previous Expected
EUR 10:00 EU: Final Manufacturing Purchasing Managers' Index 58.6 58.6
GBP 09:30 UK: Construction Purchasing Managers' Index 48.1 48.3
GBP 12:00 Bank of England Official Bank Rate  0.25% 0.50%
GBP 12:00 Bank of England Official Bank Rate Vote 2-0-7 6-0-3
GBP 12:00 Bank of England Inflation Report    
GBP 12:00 Bank of England Monetary Policy Summary    
GBP 12:00 Bank of England Asset Purchase Facility 435b 435b
GBP 12:00 Bank of England Asset Purchase Facility Votes 0-0-9 0-0-9
GBP 12:30 Bank of England Governor Carney Speaks    
USD 12:30 US: Unemployment Claims 233k 235k
USD 12:30 US: Preliminary Non-Farm Productivity 1.5% 2.5%
 

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