Bank of England Preview & Outlook For GBP

Hi there, I'm Anthony Cheung and I'm the Head of Market Analysis here at Amplify Trading. Every weekday morning I'll deliver a fundamental rundown ahead of the European Open, but if you subscribe to the channel you'll also get content from the rest of the team. So let's begin. All right, very good morning and thank you to everyone who joined us on Amplify Live last night for the masterclass and also for the live coverage of the FOMC. Hopefully it helps and you got good value out of both of those sessions. And talking about this morning, it very much is a continuation, a bit of a summation of what the FOMC did yesterday. I'll try and wrap that up in a bit of short form. There's something much more extensive I've, I've put together which is available on Amplify Live, or if you just go to my Twitter account, which you'll see here, then you can see the full kind of notes that I put out every morning. Um, but just keeping things nice and simple, uh, definitely the morning after the night before, which is then digestion of what the Fed have done, which in a sense was a two-part move. If you were part of it last night, as you'll remember, we had an initial kind of more hawkish type reaction, which was yield and dollar strength, equity weakness. And a lot of that came on the back of the fact that the kind of dovish expectations and thus positioning of the market meant that the somewhat micro-easing, as I would call it, which is the nuanced, more soft change to their wording around their commitment to their bond buying program and literally moving it to seeing substantial further progress in employment and inflation, scrapping that previous phrasing of over the coming months. That was very much expected. The other thing that markets were potentially looking for though was something called WAM, which is not, not the famous Christmas hit by that famous band, but something slightly different, which is weighted average maturity. And that's moving out then, trying to pin down yields in the long end by moving out then that, that average maturity. And they didn't do that. Some hints though, of course, came in the press conference, which ultimately then created a reversal in that move and has kind of led to the sentiment of where we're at at the moment, which is this kind of re-emphasis that, you know, reiteration inflation risks are to the downside. It's going to take some time for those inflationary pressures to even out, even with high levels of accommodation. And then essentially Powell coming out and being cautious about the economic momentum um, things remain highly uncertain. Also as well, jobless rate was still elevated while participation is still well below pandemic levels. So there was a lot of wording there to suggest that Powell by no means is in this kind of bullish mindset. He's still very much in a similar fashion to what the incoming Treasury Secretary Janet Yellen was famous for, which is this cautious, more gradual approach. And so as, as such, and pretty much as we were anticipating in our pre-FOMC kind of previews we were putting out, we were looking for a potential initial dollar strengthening move to then fade, or only for the then resumption of dollar weakness. That's exactly what we've seen. And again, the first part of that move, the dollar strength being born just purely out of the way the market was position with his expectations for last night. Net-net, I think the Fed has done exactly what they should have done at this point in time. Still a lot of things obviously to play out, which we'll talk about in a moment, like stimulus and so on, and obviously the ongoing COVID situation, vaccines, for them to really get their more clarity about the economic future. So at the moment, the dollar is down again, um, so the, the gain last night was very short-lived. Was taken back pretty much by the conclusion of the presser, uh, and equities are on the front foot. We're back to record high territory again in the NASDAQ and the S&P. Gold on the ascent, um, and WTI crude following suit. This idea then of demand picking up in the economy, supported by an ever more kind of accommodative central bank in form of the, the US, has meant that then crude through $48, targeting $49 now. And certainly on the higher timeframe charts here for WTI crude, just to have a look at one, we're at quite an interesting level here. We're back up to the highs that we printed back in the 2nd of March. So as per the kind of desk's view at Amplify, we've always been quite bullish with this move, and this is kind of one of the first targets here. But $50 is kind of the next stop. Stop on the upside. Otherwise, a couple of other things to be aware of, and that is US stimulus. So what's the latest there? Well, Senate Majority Leader Mitch McConnell said that talks about fresh aid are still ongoing. He thinks we're going to get there. So that's his part. US House Majority Leader Hoyer is hopeful that the relief deal can be done in the next 72 hours. I was hoping to have an agreement on government spending last night. That hasn't materialized as yet, but then later commented that another stopgap bill might be necessary. And, um, you know, it's interesting at the moment. I think market psychology from a behavioral perspective right now is that a deal is going to be forthcoming. And as I'm going to show you in a moment, the COVID situation I think is being massively underplayed. You know, I think everyone's got so sidetracked by record high equities and, you know, sky-high IPO valuations and so on. People have forgotten about COVID in America. And I'm not calling the top and markets are going to reverse today. I'm just saying that when I show you, I think it's going to have very important implications for not just North America, but also the likes of mainland Europe, and then also in particular the UK in the new year, which I'll discuss. Um, so yeah, stimulus at the moment, it's still looking hopeful, but if they were— remember, they only did a stopgap to this Friday, so they need to do another one to then take it through for another week or so to the end of the year. Um, going through historical sake, I remember many years ago, uh, actually being abroad in holiday. I was in Hong Kong And I got the phone call from my boss at the time— this was many years ago, I think it must have been like 2010 or 2011— and the government shut down. And that was quite a big deal at that point because there was lots of apprehension about the sovereignty of the US's kind of AAA credit rating. And lo and behold, they push it all the way up to literally New Year's Eve and then they cut a deal. So could the same thing happen again here? Could do. You would like to think though that with the worsening COVID situation, that would force and sharpen the minds of these both sides of the, uh, of the chambers of Congress to get together to get a deal done. But, you know, this is the nature of politics. So the longer that goes on, the more I guess markets could be sensitive to the potential— potentiality of actually a government shutdown, the implications of that. At the moment, I don't think we're quite there yet, and things still remain quite hopeful. A deal coming is what the markets are reflecting at the moment. Talking of something else, then we're going to flip over briefly to, to Brexit. What's the latest going on here? Well, UK and EU negotiators are believed to be in the final stretch at the moment, as these headlines would suggest, predicting a deal in the coming days, potentially at the weekend. The focus is on fisheries, so we've kind of gone back to fisheries now, and it's said to be a sign the two sides have largely settled their difference over the other major obstacles to to the accord, the level competitive playing field for businesses. Negotiations are stuck over how long the transition period should be before any new rules or quotas apply, and the UK has pushed for 3 years. The EU wants longer. The two sides are also at loggerheads at how frequently access would be renegotiated. The UK wants to do it annually. The EU wants a longer-term arrangement. Now I know these points seem quite boring and very specific, but I think if you were going to be, if you were going to be seriously effective at trading headline news, which is a very difficult thing to do, this is the level of depth of understanding the finite points of the pivot of the negotiation. For me then, you know, understanding fisheries, but specifically within that, the areas of which they are haggling over and their current stances. If I understand that, as we've just mentioned, then that makes it a little bit more binary on how probably markets will react when inevitably there's going to be a comment or a tweet or a rumor that comes out on that specific point. You will know then what action to take pretty much immediately. So again, just check out the, the kind of morning prep in the Ampfire Live chat. Otherwise then, it leads us into the Bank of England. We've got the next kind of central bank decision. This certainly is quite a bit less interesting, I would say, from what we were looking at with the, with the Federal Reserve last night. But there are some things to be aware of. Economists surveyed by Bloomberg, they all predict interest rates to remain on hold at 0.1% and the QE program to be maintained at 895 £100 billion. Now, they increased that just last month. You'll remember the kind of economic forecasts that come out of the BoE is a little bit different to the more calendar-fixed quarterly structure of the ECB and the Fed. So the BoE released theirs in November. They increased QE by a slightly larger amount than what some were anticipating, so £150 billion. So right now, given the fact that we don't know yet how Brexit is going to play out, really the state of play is they just need to sit on their hands and wait. So we're not expecting too much here actually from the Bank of England today. On that point though, and I want to talk a little bit about COVID and then I'm going to wrap it back in then to implications for the UK economy and potentially then something to think about for the pound as well going forward. And that is what's happening with COVID I'm gonna start with the US at the moment. This actually hasn't updated yet. This is from the New York Times in their tracker to reflect yesterday's numbers, and yesterday's numbers were quite eye-catching because— in a negative way, that is— fatalities in the US, if I go down to by day Deaths in the US hit another record daily high yesterday. 3,835 deaths were reported on Wednesday. So again, this chart hasn't updated. That puts the latest bar somewhere up here. Um, California alone, as far as cases were concerned— this is the national picture— but California alone had 53,711 cases. Yesterday. I believe that's almost double what it had the prior day. And the reason why I think this is quite interesting, these, these particular charts, is, you know, if you look at hospitalizations, you know, there was, there was quite a lot of talk at the time when it got to 100,000 because this is when we start talking about the nearing of capacity, which is, of course, would be hugely problematic not just for the treatment of COVID but for all other treatments that still need to be conducted. And so here that number has just continued to go up over the 7-day average, hasn't, hasn't really hesitated. Perhaps it's got a tiny bit more shallow, but it's still a fairly rapid increase. Here then is something what's interesting, I think, as a perhaps a precursor for the UK, and that is this little kink in these charts here. What happened pretty much the base of this kink was around November 26th and that period. Same thing reflected in the deaths. And you remember, this was November 26th, Thanksgiving in the US. Now, given the fact that, as we know, for actual, I guess, signs that you've contracted coronavirus to materialize, and therefore if you have symptoms and that takes anything between 5 to 14 days. If you actually look then over the period post-Thanksgiving, this is what happened. And actually, if you look at the nationwide acceleration of cases, and there's obviously an argument for, for more large-scale testing, but that could be said that, you know, we're already having large-scale testing through recent months anyway, so that argument is probably lesser extent now. I'm mixing out the red— the left-hand side of the chart, more looking at the last 3 months. But the acceleration of cases is the steepest it ever was post-Thanksgiving. Subsequently, deaths also, um, as steep if not steeper than what we saw in the initial outbreak. And with this latest number putting us off this chart up here near 4,000 as of numbers yesterday, putting ever increasing more pressure on the infrastructure for hospitals in the, in the US. Now, so the thing I'm tying this into then is in the UK there's been a lot of political pressure on the Prime Minister Boris Johnson and his government at the moment in regard to what they should do with the loosening, the planned loosening of restrictions over the Christmas period. Now they've tried to enforce certain type of rules around it in terms of the number of households that you can mix within your bubble and so on. But it looks at this point, at least, they're going to stick to that plan. And given that this is what happened with Thanksgiving, well, one of the things is this is what's already happening in the UK prior to the loosening of restrictions. And that is over the course of the last week, case numbers in the UK have gone up over 50%. And that has meant then that an increasingly larger proportion, as we saw on Wednesday, of the country has moved from Tier 2 to Tier 3. So COVID is getting worse right now in Great Britain. And what this is going to mean then is that— what I'm slightly apprehensive about is if this Christmas plan goes ahead with the government then what does it look like in terms of those graphics when it comes to the UK in here? What does that look like when it comes to the first week of January given that again incubation period of the, of the virus? And so that then leads to kind of this chart I guess which is quite an interesting one, it's just one metric but it serves to make the point I'm trying to express here which is how the pound could react under different kind of macro scenarios. And this would be then a deal, a no-deal Brexit. And this, you know, let's take that as our first kind of example. So looking at these lines here, you can see the blue, the blue one. What if— what would the unemployment situation look like over the period of then I guess going into Q1 of 2021, which is where it would be most disruptive. And as you can see there, the rate or number of joblessness basically doubles over that period. Throw in then the net— the fact of downside virus developments, because one of the things here is that at the moment we're in this tiering system that's been adopted by the government, and even at its third third level, it's still not as strict as what we initially had enforced back in spring to get the, the first outbreak under control. So this then leads to a few interesting potential projections for sterling, I think, going into the coming weeks and into January, because if you have— and this is not the base case scenario, which is for a deal Brexit to happen. But if no Brexit happens, and let's say it is a disruptive, disorderly, acrimonious breakup of talks, the worst-case scenario, plus then you start to see that sharp acceleration of COVID in early January, then this is when we start looking then at forecasting for the pound. And it was an interesting conversation we were having with some of the guys Yesterday, and this was kind of thinking it through about the short-term limited upside relief on, on a deal being secured and a push-up to 140, perhaps capped in the near term by further worsening of the COVID situation. But that aside, implementation successfully of a rollout of vaccine means that then we might potentially then grind up to 144 and beyond into the second half of 2021. On the flip side, um, we're breaking higher at the moment in cable, and it's quite a key level where we close on the week actually at the moment. But this is all on hopes of a deal is going to be forthcoming. We seemingly are making progress, and the persistent nature of the dollar weakness— if we get through down to the end of December and we're sitting here on the 28th, 29th, there's still no deal, the pound weakness then on apprehension of the possibility of a no-deal would probably outweigh then the more consistent dollar weakness over that period. And therefore, we might start to edge back down below 135, below 134, and perhaps even lower. If then there is a no-deal and it is that worst-case scenario, a disorderly one, the reopening of markets— be expecting a decent gap down the reopening of markets into the new year. With then overlaid the compounding impact of what a worsening virus situation would have, mainly because it's already worsening, whether or not that's down to the new variant of coronavirus or not. But that then is going to mean tighter restrictions that obviously will have subsequently an impact on economic activity, increased job loss, lower confidence, and that's gonna, that's gonna be feed through into more negative for the pound. If that happens, then the Bank of England, who are sitting on the sidelines today, are going to have to throw more QE at it. The negative rate conversation will come back. And I think at that point then, the target on the first two things, on the disorderly Brexit and the worsening COVID, I think we go 120. And if then the Bank of England have to start moving in that way, we go down to 115. I guess the, the counteracting force of that is, is some of that weakness offset by the fact that the, the dollar is particularly weak at the moment, which might slow down its descent. But yeah, just a, just a few things to think about there from a bigger medium-term perspective, just outside of the intraday kind of setup at the moment that I just wanted to share. The other places with COVID to be aware of is that Germany also reported over 45,000 cases, um, this morning. That is the biggest jump in infections and over twice the number from the day before. So we're certainly not out of the woods here yet. But as I say, as the markets are responding at the moment, um, seemingly just happy with the status quo from the central bank's accommodative kind of maneuvers that we've seen is enough for now, but definitely tracking through and post-Christmas, I think it's going to be an interesting start to the new year. All right, a few things though. Obviously, what is important is vaccines, and there are— there's actually some fairly good news on that front. European authorities are pushing for a compressed approval time for the COVID-19 vaccine from Pfizer and BioNTech, according to people familiar with the plan, which could enable a rollout on the continent before Christmas. And obviously with this, it couldn't come sooner. I think at the moment in terms of the UK, it's been roughly, what, a week or so now, and I think it's around 140,000 people have received those shots. And the European Commission, their oversight committee, is meeting on Monday and that's where they'll plan to sign off as soon as the same day in order to get this through as quickly as possible. So timing-wise, that's where the vaccine sits on the EU side. The other thing that, that's quite positive is UK expects its medicines regulator to decide whether to approve the coronavirus vaccine from AstraZeneca and Oxford University within weeks, potentially early January. British Officials expect the Astra shot to give a major boost to the inoculation program, even, or if it is approved, because it would be much easier to roll out. I've already read a couple of articles last night talking about there's been a few issues with the Pfizer shot in the, the storage, the ultra-cold temperatures that's required to store it. Sometimes then, I think the most common one has been it's got got too cold because a lot of the— it's quite an unusual thing to have such cool temperatures that trying to work around that has been a little bit problematic, as most people were foreseeing. So the main thing here is that as we go further forward into 2021 and as some of these other companies like AstraZeneca or J&J and so on come forward with perhaps then cheaper, uh, more better infrastructure to manufacture, especially compared to someone like Moderna, for example, then this is all going to help build out the inoculation programs and then the phasing-in process and more greater scale vaccinations. But obviously that's going to take some time, so just something to be aware of. And then the final thing I just wanted to mention was overnight the Aussie— well, bid Dollar weakness, of course, but you also had some, some good employment data coming out of Australia for November. Employment number was at 90,000, above the expected 50,000. Unemployment rate dropped to 6.8% against expected 7%. What I'll do— I haven't got time to share all of the, the charts, but definitely given the nature of the Dixie below 90, now we're at some very interesting kind of higher time frame If you put your charts on a daily for much of the dollar-based currency pairs, there's some really interesting technical levels around pretty much across the board at the moment. Obviously, US stock futures are at record highs currently, and oil's at quite a key level, and gold just continues the reversal for now. So definitely a lot of things to get your teeth into for the session ahead. But I'm going to leave it at that. I think we've covered enough. And then if there's any questions at all, I'll see you on the live stream in Amplify Live. Okay guys, have a good day, take care, I'll see you tomorrow.