We saw Sterling push higher yesterday as the Bank of England interest rate decision came to light, with mixed opinions regarding the action the BoE would take with a 45% probability of a rate cut priced in prior to the announcement. The result was somewhat unexpected with the committee voting to hold interest rates at 0.75% by a margin of 7-2 vote, the same reading as the previous meeting and the same two members voting to cut rates. In addition, the central bank was slightly more hawkish than the market was expecting suggesting that “some modest tightening” maybe needed. However, they went on to comment that growth had weakened due to the reduced investment as a result of Brexit.
The BoE assumptions are based on the UK reaching a deep trade agreement with the EU but some frictions from custom checks will come at the start of 2021. In summary, the BoE were more optimistic than what the market initially expected, resulting in a surge in Sterling across the board. According to the CME BoEWatch Tool, the probability of a cut at March’s meeting sits at only 22%.
Looking ahead, focus in the UK will be on the historic Brexit as the UK leaves the EU and enters the transition period at 23:00 GMT. The next chapter of the saga will follow and focus on the talks between the UK and EU formulating a trade deal.
US Economy Continues to Grow but at Its Slowest Pace Since President Trump Took Office
Across in the US, economic growth continued to remain positive but albeit at the slowest pace in 2019. The gross domestic product rose by 2.1% for Q4. The economy expanded by 2.3% in 2019, the weakest annual rate since President Donald Trump took office and short of the 3% growth his administration has long promised.
Today, the focus of the market will be on the personal consumption expenditure (PCE) deflator – the Fed’s preferred inflation measure.