BoE Could Boost the Sterling

Daily Analysis - 22/03/2018

Bank of England's Turn

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The debut of Jerome Powell in his first rate hike was less hawkish though the Fed upgraded the projection of the US economy. Today, BoE monetary policy meeting is in focus. The US oil production could become a threat for the crude oil prices.

BOE Could Signal a Rate hike in May


The so called “Super Thursday” is in focus as a monetary policy announcement from the Bank of England is among the highlights of the European trading hours. The policy is expected to remain unchanged though investors await for the tone of minutes most notably the vote count on the rate-setting MPC committee.

Even though data showed that UK inflation slowed more than anticipated in February, wages have finally closed the gap with inflation. UK wage growth accelerates as employment rate hits record and the unemployment rate has not been lower since 1975.

Together with the EU-UK agreement on a transition period may allow the Bank of England to maintain its hawkish bias, and thereby support the pound. Market participants are likely to maintain their bets that a May hike may be on the cards.

As it stands, the markets favor a rate hike in May, pricing in its probability at 65.3%. Seeing a meaningful minority vote in favor of one this time around might help prepare the way for an upcoming hike, boosting its perceived likelihood and sending the British Pound upward.

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Powell less Hawkish than Expected


The U.S. Federal Reserve raised interest rates on Wednesday and kept the forecast for at least two more hikes within 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation which in result could spur more aggressive tightening policies in the future.

On Wednesday, stocks gave up earlier gains after the Federal Reserve raised interest rates and upgraded its outlook for the economy, as was widely expected. At the beginning of the trading session in the US, Dow Jones 30 traded 250 points higher and after the rate hike it closed 44 points lower. The S&P 500 lost 0.18%, and the Nasdaq shed 0.26%.

The S&P 500 and Nasdaq rose as much as 0.8% and 0.6%, respectively, immediately after the Fed's announcement.

As per the market expectations, the Fed raised overnight rates by 25 basis points. Central bank officials also raised their GDP forecast.

"The economic outlook has strengthened in recent months," the committee said in its post-meeting statement, a sentence that had not been in previous releases. Fed officials kept their projections for the federal funds rate unchanged for 2018.

The central bank also raised its 2019 forecast, saying it sees the benchmark rate at 2.9%, up from a 2.7% projection released in December.

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US Oil Production Rises


The persistent rise in U.S. crude production threatens to undermine efforts led by producer cartel OPEC to tighten the market and as a result, oil prices have given up earlier gains.

Both benchmarks, the Brent and WTI crude futures, hit their highest levels on Wednesday since early February, having risen around 10% from March lows.

The bulls in the oil market are being threatened by U.S. crude production, which climbed to a fresh record of 10.4 million barrels per day (bpd) last week, putting the United States ahead of top exporter Saudi Arabia and within reach of Russia’s 11 million bpd.

Despite the rise in U.S. output, up by almost a quarter since mid-2016, traders still believe that the oil markets remain well supported.

Another sign of healthy demand, is the U.S. crude inventories which fell 2.6 million barrels in the week ended March 16 to 428.31 million barrels, according to the Energy Information Administration (EIA) said late on Wednesday.

The supply-cut led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia, which started in 2017 and is scheduled to go on for the rest of 2018 further support the oil prices. OPEC said on Wednesday the cuts were close to having the desired effect of bringing down global inventories to five year averages, although it gave little detail.

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