Article Highlights

  • Swiss retail sales y/y: -3.5% vs. 0.5% expected, 0.8% previous
  • U.K. construction PMI: 52.2 vs. 53.8 expected, 54.2 previous
  • Euro Zone PPI m/m: 0.7% vs. 0.5% expected, 0.3% previous
  • BOE: 9-0 vote to maintain the Bank Rate at 0.25% as expected
  • BOE: 9-0 vote to continue government bond purchases up to £435 as expected
  • BOE: 9-0 vote to continue corporate bond purchases up to £10B as expected
  • BOE: “Monetary policy could respond, in either direction”
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The pound was under the spotlight during today’s morning London session, thanks mainly to the BOE statement. Although “hot seat” would probably be more accurate since the pound tanked across the board. Other than that, another round of Greenback selling was also a major theme.

Major Events/Reports:

U.K. construction PMI drops – Markit released its January construction PMI report for the U.K. earlier. And its headline reading dropped from 54.2 to 52.2, which is a much harder drop than the expected slide to 53.9. In addition, January’s reading is the lowest reading in five months. But on a more upbeat note, the reading is still above the 50.0 neutral level, so the construction sector is still growing, albeit at a slower pace. Also, the readings have been above 50.0 for five months running already.

According to commentary from the PMI report, the slowdown in growth was due to weaker output in all three sub-sectors (housing, commercial, and civil engineering). Housing construction, in particular, was a major drag since “the latest expansion was the weakest for five months.” Aside from slower construction activity, new work orders also moderated, with the rise in new work orders being “the least marked since October 2016.”

Risk aversion strikes back – After a brief stay yesterday, risk appetite was kicked out of the door today and risk aversion took its place, sending European equity indices lower.

  • The pan-European FTSEurofirst 300 was down by 0.12% to 1,431.44
  • The blue-chup Euro Stoxx 50 was down by 0.05% to 3,254.00
  • Germany’s DAX was also already down by 0.15% to 11,641.50

U.S. equity futures also felt the weight of returning risk-off vibes.

  • S&P 500 futures were down by 0.29% to 2,268.00
  • Nasdaq futures were down by 0.34% to 5,130.88

According to market analysts, the returning risk-off vibes in Europe was due to disappointing earnings results for several companies.

MPC rate decision, minutes, and inflation report – The BOE’s MPC released the minutes for its monetary policy huddle, as well as its quarterly inflation report, and below are some of the more important and/or interesting points in, well, bullet points for easier reading:

  • The MPC unanimously voted to maintain the BOE’s current monetary policy.
  • 9-0 vote to keep the Bank Rate at 0.25%.
  • 9-0 vote to continue government bond purchases up to a total of £435 billion.
  • 9-0 vote to continue corporate bond purchases up to a total of £10 billion.
  • Monetary policy cannot prevent either the real adjustment that is necessary as the UK moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany it.”
  • Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.”
  • The MPC must consider and balance the trade-offs between supporting the economy and quickly returning inflation to the BOE’s target level.
  • At its February meeting, the MPC continued to judge that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual.”
  • As such, “the current stance of monetary policy remained appropriate.”
  • As the Committee has previously noted, however, there are limits to the extent that above-target inflation can be tolerated.”
  • Domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the Committee had anticipated following the referendum.”
  • However, “real consumer spending is likely to slow” because household income growth will likely weaken.
  • And household income growth is expected to weaken, in turn, because of “continued moderation in pay growth and higher import prices following sterling’s depreciation.
  • Still, the BOE upgraded its growth projections for the forecast period, to reflect “the fiscal stimulus announced in the Chancellor’s Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households.”
  • 2017 GDP forecasted at 2.0% (1.4% back in November)
  • 2018 GDP forecasted at 1.6% (1.5% back in November)
  • 2019 GDP forecasted at 1.7% (1.6% back in November)
  • CPI is expected to shoot up faster in the near term, particularly in 2017, due mainly to external factors.
  • These external factors are: “the unwinding of drags from past falls in the prices of energy, food and other imported items, and some pass-through of recent rises in energy and food prices.”
  • A further rise in inflation above the target is expected as the 18% fall in sterling since November 2015 feeds through to higher retail prices.”
  • However, the inflationary effects from the weaker pound are expected to fall back in 2018.
  • 2017 Q1 CPI forecasted at 2.0% (1.8% back in November)
  • 2018 Q1 CPI forecasted at 2.7% (2.8% back in November)
  • 2019 Q1 CPI forecasted at 2.6% (2.6% back in November)
  • 2020 Q1 CPI forecasted at 2.4% (new forecast)
  • In the nearer term, unemployment is expected to worsen at a slower rate than originally thought before improving, reflecting “stronger demand growth.”
  • 2017 Q1 jobless rate forecasted at 4.9% (5.0% back in November)
  • 2018 Q1 jobless rate forecasted at 5.0% (5.5% back in November)
  • 2019 Q1 jobless rate forecasted at 5.0% (5.6% back in November)
  • 2020 Q1 jobless rate forecasted at 4.8% (new forecast)
  • Despite the upgrades and expectations that inflation overshoot would only be temporary, the BOE maintained its very neutral bias.
  • Monetary policy could respond, in either direction, to changes to the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target.”

BOE’s Carney speaks – BOE Guv’nah Mark Carney had a little presser shortly after the BOE announced its monetary policy. And according to Carney, “Growth has remained resilient since the referendum, with the UK posting the fastest rate in the G7 last year.”

However, Brexit does have adverse effects because “Uncertainty over future arrangements is weighing on business investment, which has been flat since the end of 2015.”

Major Market Movers:

GBP – The pound had a promising start but got slapped lower when Markit released the U.K.’s construction PMI reading, which revealed a harder-than-expected stumble. The pound then tried to recover ahead of the BOE statement, but unfortunately (for pound bulls anyway) got kicked lower when the BOE revealed that it was maintaining its neutral bias despite economic upgrades, which implied that the BOE was in hurry to hike.

GBP/USD was down by 95 pips (-0.76%) to 1.2570, GBP/AUD was down by 192 pips (-1.16%) to 1.6371, GBP/JPY was down by 157 pips (-1.10%) to 141.33

USD – The Greenback resumed its broad-based slide when the morning London session rolled around. Heck, it even initially lost out to the pound. Anyhow, there were no direct catalysts for the Greenback’s weakness. Market analysts are still pointing to the fallout from yesterday’s not-so-hawkish FOMC statement, though.

EUR/USD was up by 12 pips (+0.11%) to 1.0803, NZD/USD was up by 25 pips (+0.34%) to 0.7311, AUD/USD was up by 35 pips (+0.46%) to 0.7680

Watch Out For:

  • 1:30 pm GMT: U.S. initial jobless claims (250K expected, 259 previous)
  • 1:30 pm GMT: U.S. non-farm productivity (1.0% expected, 3.1% previous) and unit labor costs (1.9% expected, 0.7% previous)
  • 10:30 pm GMT: AIG’s Australian services index (57.7 previous)

See also:

Asian Session Recap 
U.S. Session Recap

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