Spotlight on BoE’s Super-Thursday
The Pound is holding steady ahead of today’s key monetary assessment and policy decisions by the Bank of England (BoE). The BoE is not expected to raise interest rates, but governor Mark Carney’s comments on inflation and UK growth will be pivotal for Sterling’s strength or weakness. Also, a vote by over two members of the monetary policy committee to increase interest rates will send a signal that the central bank is likely to increase rates by the middle of this year.
The US Dollar was supported after congressional leaders reached a two-year budget deal, that will considerably widen the federal deficit. The senate and the house are expected to pass the deal today, although there are objections from both political parties. Among the chief economic concerns is the risk that the sharp increase in spending could accelerate inflation, requiring the Federal Reserve to raise interest rates faster.
Pound Sterling – UK Markets
The Pound remains weaker to the US Dollar, with the exchange rate at $1.38. Sterling is rising slowly against the Euro, exchanging higher at €1.13.
Today’s Bank of England meeting and press conference, known as super-Thursday, will be closely monitored for the BoE’s assessment of the UK’s economic strength. The quarterly inflation and wage growth reports will be the secondary focus since they will provide further economic data. The BoE monetary policy committee’s votes on raising interest rates above the current rate of 0.5% will also be scrutinised, given the expectation of an interest rate increase up to 0.75% in May, if a Brexit transition is agreed.
This is the second day of cabinet meetings to decide the government’s position on a future trade deal with EU, the Irish border and citizen’s rights. There are reports of “substantial divisions” among the 11-person committee, which must come to an agreement on the transition period before March, or risk leaving the EU without a deal. A leaked government analysis has found that a no-deal Brexit would cost public finances £80bn and require the government to borrow £120bn more over the next 15 years.
The European Commission (EC) has said that the UK’s growth will lag behind all other European Union countries this year and next, even if it maintains the same trading relationship with EU. In the EC’s winter economic forecast, growth this year was expected to slow to 1.4% and drop to 1.1% next year. The EC said its projections are based on the “purely technical assumption of status quo in terms of trading relations” in 2019. This might not be possible, since the government’s objections to the EU’s terms make it increasingly difficult to meet the March deadline for agreeing the terms of the transition phase.
US Dollar – US Markets
The US Dollar is slightly stronger against the Euro, exchanging at €0.80. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is up to a two-week high, at 90.50.
Today, US lawmakers are set to vote on a two-year budget deal that would add between $300bn to $500bn in government spending. The proposal has been called a debt-ballooning “monstrosity” by US budget hawks. US Senate leaders are confident they can secure a deal that includes president Trump’s demand for more military spending, as well as the increased funding for domestic programmes that Democrats seek. Trump wants Democrats to agree to a Mexican border wall in exchange for allowing young immigrants, known as “Dreamers,” the opportunity for citizenship. The house of representatives must reach a deal on the bill by midnight to avert another government shutdown.
The Federal Reserve Board’s release of US Consumer Credit Change report showed a gain of $18.45bn for December, which fell short of the expected figure of $20bn. November’s total consumer borrowing was revised higher, up to $31.02bn. In 2017, consumer credit rose by 5.4%, which was down from the previous year’s increase of 6.7%.
Euro – European Markets
The Euro has weakened against the US Dollar, with the exchange rate set lower at $1.22.
Germany’s grand coalition deal between Angela Merkel’s Christian Democratic Union (CDU) and Martin Schulz’s centre-left Social Democrats (SPD), was finally reached yesterday. After marathon talks since January, SPD appears to scored a victory by securing the finance, foreign and labour ministries. Schultz is expected to move to foreign ministry and turn party leadership over to former labour minister Andrea Nahles. The influential Eurozone economic role of finance minister may be taken by Olaf Scholz, the current SPD mayor of Hamburg, who is expected to increase current spending levels.
A dozen UK banks have taken formal steps to seek new licences in Europe, according to a European Central Bank (ECB) official. In a press conference yesterday, Sabine Lautenschlaeger, vice chair of the ECB’s oversight arm, said that eight UK banks have begun the process and “Four other banks are planning to significantly extend their activities in the euro area.” She said that over 50 banks have had meetings with European supervisors and are “in a pre-application phase right now.” Lautenschlaeger also said that the deadline for banks who want relocate from the UK to the euro area would be by the second quarter of 2018, at the latest.
Yesterday, the European Commission published a paper that shows it wants to have the power to penalise the UK during the transition period. It intends to block British companies from aspects of the single market as a means of resolving disputes in cases where going to the European court of justice would take too long. The government dismissed the document as a “draft,” pointing to the negotiating objectives Brexit secretary David Davis set out in his recent speech.
Other Currencies – Highlights
Sterling has risen a little against the Australian Dollar, with the exchange rate at 1.77 AUD. The Reserve Bank of Australia’s (RBA) monetary policy statement has been seen as cautious by economists who expect that interest rates will remain firmly on hold at 1.5% in 2018, until wage growth rises.
The Pound is stronger against the New Zealand Dollar today, exchanging higher at 1.92 NZD. The Reserve Bank of New Zealand (RBNZ) warned borrowers to brace for the risk of a sharp rise in interest rates. The RBNZ also decided to keep the official cash rate at the current record low of 1.75% for more than another year, since inflation remains low.
The Pound is trading higher against the Canadian Dollar, exchanging at 1.74CAD. The value of Canadian building permits for December rose by over twice the expected figure of 2.0%, spiking to 4.8%. Residential permits in the province of Ontario jumped by 15.7% after government measures to reduce rising house prices.