It was a quiet day in terms of economic data from the UK yesterday, with only the Nationwide house price index to note which saw a welcomed 0.5% increase for January with the year-on-year increasing to 1.9% from 1.4%. This represents the strongest reading since November 2018, and although not a key driver of Sterling, does provide some comfort for the UK economy. In terms of Brexit, the European parliament approved the Brexit withdrawal terms and Brexit will go ahead as scheduled on Friday. In the meantime, the EU’s Michel Barnier stated that there is the risk of cliff-edge talks on trade and fisheries at the end of 2020. Sterling has been fairly range bound this past week, with traders continuing to speculate over the Bank of England’s interest rate decision today.
Looking to the day ahead, the market will be focused on the interest rate decision. The odds of a rate cut have fluctuated over the last month from a low of 6% to a peak of 72% and now currently lies at 24%, according to CME's BOEWatch Tool. This has been consistently changing with the ebbs and flow of economic data and comments from banking officials. The market will be keen to know what the BoE does and the accompanying rhetoric that will follow. The rhetoric will be closely monitored for clues on future policy action.
US Federal Reserve Keep Interest Rates on Hold
Overnight the Federal Reserve maintained interest rates at 1.75%, in line with expectations and with a 9-0 vote. The statement revealed that economic activity had been moderate while the labour market had remained strong. Chairmen Powell reiterated that the Fed is not satisfied with inflation running below 2.0%, but he also stated that there was room for cautious optimism over the global outlook. In the meantime, the goods trade deficit widened sharply from the previous month. The sharp widening in the deficit will tend to undermine fourth-quarter GDP estimates.
In the US, the GDP report is forecast to show that the economy grew by around 2% (annualised) in the final quarter of 2019, close to the mark of Q2 and Q3.