Sterling sentiment remained fragile yesterday as speculation mounted over the prospect of a Bank of England rate cut which could come as early as 30th January following a flurry of disappointing data from the UK as well as downbeat comments from senior MPC officials. The current probability of a January rate cut stands at 45%; up significantly this past week where we have heard from a number of leading officials who have suggested the UK economy needs support following prolonged contraction. In the meantime, Prime Minister Johnson reiterated that he would not grant a second Scottish Independence referendum whilst stating that it is very likely that the UK will secure a comprehensive trade deal with the EU by the end of 2020.
Looking to the day ahead, the market will focus on the UK inflation data for clues on future policy action. The ‘headline’ annual CPI inflation is expected to hold at 1.5% for the third successive month. The BoE target for inflation is 2% meaning that if the rate comes out as expected it will be the fifth consecutive month below par; this could have an impact on the expectations of a rate cut in the near future. In addition to this, the market will focus on comments from MPC member Saunders; he is one of the two members currently voting for a cut in rates.
US Inflation Data Comes in Below Forecasts, Could There Be a Change in US Monetary Policy?
Over to the US, traders were focused on key inflation data which painted a mixed picture for the US economy. The monthly data came in slightly below expectation, posting a reading of 0.2% against expectations of 0.3% although the annualised figure showed an increase from 2.1% to 2.3% which was in line with initial forecasts. The market is continuing to watch data and comments for clues on future policy action although currently there are no expectations for any rate changes in the near term. This was reinforced by Kansas City Fed President George stated that it is appropriate to keep interest rates on hold in the short term.
The ‘phase one’ trade deal between the US and China is scheduled to be signed later today. The signing would mean a reduction in some tariffs and the suspension of further increases on Chinese goods. In return, China is to pick up its purchases of US agricultural products. The market will be keen to monitor the post signing tone and decipher what this could mean to boost global business confidence.