Good morning,

GBP: Watch the voting records

Today is the first Super Thursday of the year and the Bank of England will weigh in on interest rates at noon. The Quarterly Inflation Report will be released at the same time with a press conference to explain and expand on the Monetary Policy Committee’s thinking at 12.30. The focus for the pound will be threefold; inflation, wages and the voting record.

Since the most recent forecasts were put together in November, we have seen sterling gain around 3.2% on a trade weighted basis (we estimate that this could depress inflation by about 0.25% if maintained) whilst oil prices have risen by around 10% over the same time period.

The increase in interest rates in November have caused longer term borrowing and mortgage rates to rise by 0.2% and 0.05% respectively. While seemingly very little, the Bank will want to guard against excessive tightening of financial conditions while the economy remains so keenly balanced. We do not think the inflation profile will move that much but lower inflation forecasts will temper sterling.

We are not shifting from the consensus view in expecting that the Bank of England will leave rates untouched today. What will drive sterling in the aftermath of the announcement, is the voting record and it is entirely possible that Monetary Policy Committee members McCafferty and Saunders, who have driven the discussion on hikes, plump for another this time around; if they do then investors will see that as a sign that the curve that currently is pricing in a hike in July as being overly cautious.

In Brexit news, MPs have finally been able to see the 15yr growth predictions for regional economies that were first leaked last week. The hit to growth depends on the trading arrangement the UK strikes with the EU – either access to the single market, a Free Trade Agreement or falling on to World Trade Organisation rules – and varies from a 1% hit to the London economy should the UK remain part of the single market to a 16% fall in growth in the North East should the UK not be able to sign a deal.

CNH: Reopening for business

China has announced overnight that it will restart its Qualified Domestic Limited Partnership plan having halted it 2 years ago, sending the yuan lower overnight. The plan allows global investment firms to market for investment within China and is a direct reversal of capital controls that have been in place for the past few years that limit the amount of yuan that can be transferred out of the country.

This is an interesting step for the Chinese authorities towards further liberalisation of the Chinese currency. USDCNY rose by the most in a day for 30 months as a result. We do not see this as the beginning of a reversal for USDCNY however, we will need to see dollar do a lot more of the heavy lifting for that.

USD: Rate hikes still on track

Further comments from Federal Reserve members yesterday drove the USD higher as 4 members of the rate setting Federal Open Markets Committee told reporters that the recent volatility in equity markets had not shifted their expectations for the US dollar or interest rate moves

Dollar gained on the session against all G10 currencies except the Japanese yen.

Have a great day