The Bank of England surprised with an early announcement of a rate cut to 0.25%, down from 0.75%. Also, a new lending facility aimed at boosting lending to businesses and ensure that lower interest rates are passed on to customers was unveiled. UK GDP was unchanged in January, whereas a 0.2% rise had been forecast. The year-on-year increase also declined to 0.6%. New Chancellor Rishi Sunak announced a £30bn stimulus package for 2020 with additional funding for the NHS and a substantial business support package. Significantly, there will also be a £175bn increase in spending over the next five years. Budget deficit forecasts were revised up sharply and fiscal rules are likely to be broken.
The Pound drifted weaker as global equities dipped. Speculation arose that the next round of EU/UK trade talks would be postponed. Overnight, RICS housing data rose to the highest level for nearly 4 years, but global risk conditions prevented the Pound from capitalising, especially with another COBRA meeting at lunchtime today. The Pound traded below 1.1365 against the Euro and 1.2800 on the Dollar. With no tier one UK data, all eyes will be on the Cobra meeting and the ECB rate decision.
US consumer prices increased 0.1% for February, slightly below consensus forecasts of 0.2% with the year-on-year rate at 2.3% from 2.5%. Core prices increased by 0.2%, with an annual increase slightly above market expectations at 2.4% from 2.3%. The dollar regained ground during New York trading with Euro losses steepening to near 1.1250 after a break below 1.1300. After the US close, President Trump announced that it would ban travel from much of Europe for 30 days. The ban will apply to anyone who has been in the Schengen area within the past 14 days. Although there will be damage to the Euro-zone, risk appetite also deteriorated and the Euro secured a recovery to near 1.1300 as markets expected at least a 0.75% Fed cut.
Markets are expecting a small ECB rate cut at Thursday’s policy meeting and the potential for more favourable lending packages for banks. Bank President Lagarde is likely to emphasise the need for an urgent fiscal response and her press conference overall will be important for market sentiment with further choppy trading inevitable during the day.
The Euro failed to sustain gains in choppy conditions yesterday whilst Chancellor Merkel’s warning over the risk of substantial coronavirus cases within Germany undermined sentiment. Especially with further bickering over a fiscal response. There were also reports that the US would impose additional travel restrictions on EU countries, which in the early hours of this morning became a reality..
Markets are also expecting a small ECB rate cut at today’s meeting and the potential for more favourable lending packages for banks. ECB President Lagarde is likely to also emphasise the need for an urgent fiscal response and her press conference will be important for market sentiment with further choppy trading inevitable today..
Data to watch
12.30 USD - Core PPI
12.30 USD - PPI
12.45 EUR - Monetary Policy Statement
13.30 EUR - ECB Press Conference
Posted in Daily Market News on Mar 12 2020