BoE Rate Cut Speculation Intensifies
Speculation that a Bank of England (BoE) interest rate cut could be around the corner continued to cast a shadow over the pound yesterday morning. In the absence of fresh UK data, the GBP vs USD rate was left exposed to lingering concerns over the health of the economic outlook. Rate cut expectations gathered momentum on Monday in the wake of disappointing UK GDP figures and downbeat commentary from BoE policymakers. For example, BoE governor Mark Carney recently suggested that the bank would ‘favour a relatively prompt response’ if weak growth persisted.
US Consumer Prices Rise Slightly in December
Meanwhile, over in the US, the dollar was able to steer a steady course thanks to upbeat comments from Boston Fed President Eric Rosengren and an encouraging inflation reading. Mr Rosengren does not see a need to do much with interest rates given the “relatively positive” outlook for the US economy. Fed policymakers have issued relatively optimistic rhetoric around the economic outlook so far this year, reducing the odds of an interest rate cut.
US consumer prices increased slightly in December and monthly underlying inflation pressures eased. The Consumer Price Index (CPI) – which rose 0.2% last month after climbing 0.3% in November – could encourage the Federal Reserve to keep interest rates unchanged throughout 2020 and beyond. The US central bank left rates on hold last month and signalled that monetary policy could remain steady this year, having reduced the cost of borrowing three times in 2019; a course of action that could put pressure on the pound vs us dollar rate.
Looking Ahead
After a lengthy standoff between the world’s two economic powers, US President Donald Trump is finally set to sign a phase one trade deal with China today. This will pave the way for phase two negotiations to begin this year, which will address thornier issues such as restrictions on digital trade and cybersecurity. Prior to this, the Producer Price Index (excluding food and energy) is published, which measures the average changes in prices in primary US markets.
Investors in the pound will be hoping today’s UK inflation reading gives BoE policymakers reason to make a more upbeat assessment of interest rates. Unfortunately, economists forecast a slight easing in the CPI, which could trigger further weakness. A busy day also sees the release of the Retail Price Index, PPI Core Output and Producer Price Index – Input.
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