Good morning,
Yesterday, the markets showed they still hold a clear relationship with the macroeconomic fundamentals around currency, rather than just the recent fling with politics.
The Monetary Policy Report shocked the pound yesterday, with two members voting for a rate cut, albeit the majority rule was to maintain the rates the same.
So, how do we interpret the report and the corresponding 0.5% drop on the GBPEUR, 0.6% drop on the USD and what does it mean for the pound going forward?
The key aspects that markets focused on the Bank of England addressing were twofold; the expectations around Capital Expenditure in the UK, and the future outlook on inflation and the corresponding interest rate path to address this.
On the investment in the UK, rather than a more positive situation of deferral until clarity around Brexit, it seemed the bank are considering that some of this investment may not be recovered, due to the global slowing and Brexit block.
Around the rate policy, the general market consensus has already priced in a likely interest rate cut in 2020, however the effect of the two dovish votes yesterday brings a cut into the picture as early as January.
At present, a Conservative government is the only party that calls for a swift withdrawal agreement. So, political differences aside, a delay in the withdrawal agreement will drag on the UK economy as uncertainty extends, which we have seen statistically thus far. Therefore, the Bank of England will likely be reactive in their policy dependent upon the path of the election, planting seeds for the more long-term sterling outlook.
They key take from it is, although the picture is being painted of a dismal outlook for the UK policy, the reality is that the Bank of England are as in the dark with where the UK will be following the General Election as everyone, and the report effectively has stated that they will be responsive dependant on which path we end up on.
2020 will be a year of focus on central bank policies and how they decide to guide their currencies in the face of global slowdown risks, Brexit uncertainty, and a struggling inflation level across the board.
Have a great weekend.