Bank of England Rate Call On A Knife Edge

Very good morning, Thursday 30th of January. Hope you're doing well. Just having a quick look at the usual first starting screen. That is something we're very familiar with now, which is a quick spot check on the Wuhan coronavirus and where that's at at the moment. And you can see numbers are still heading north at the moment, but I would say at a relatively controlled pace. We're at 7,783 total deaths at 1:70. So certainly, you know, I don't want to come across like I'm belittling this as an issue for the people obviously experiencing this on the ground in, in China and worldwide, but from a market's point of view, I don't think this is too dissimilar to the type of pattern I think that, that people were anticipating. I know it's quite small, but here on the left-hand side you can see where the confirmed cases by region are, and as we know, still predominantly based in mainland China and surrounding regions. So in kind of chronological order of size of cases: Thailand, Japan, Hong Kong. If you scroll down to the bottom though, USA, where the 5 cases first came about, I mean, it's probably about 4 or 5 days ago now, that number hasn't moved. Germany's at 4, Canada 3. So far then, other than Germany, kind of mainland Europe has been pretty much untouched. You can see here small little dots there in France, France and Germany. So a couple things certainly we are looking out for on this matter in regards to the World Health Organization experts. They were going to give a press conference yesterday. My understanding is that the experts will meet today in Geneva to consider whether or not to declare the outbreak an international emergency. The organization then have 15 countries now with confirmed cases. But irrespective of that, you know, even if they did go and take that step, how is that going to immediately move markets? I don't think so, it would be my view. But as has been the kind of case throughout, what we've been seeing is that certainly this is having an impact on the Asia-Pacific session, perhaps not so much as yet, given those reasons about how aggressive or not the spread has been globally. It hasn't really quite influenced the other markets like it was back on Monday. This is just a quick look at the, the MSCI Asia-Pacific Index. So this kind of clubs together then the region as a whole to create an overview of that, how, how that region is performing. As you can see here, going back over the last kind of 12 months or so, the key issue here really has been Trump and the escalation of the tariffs in those various points, both through kind of Q2 and Q3 of last year. However, that for the moment at least has been put aside as we have the Phase 1 trade deal. But the virus concerns certainly have had to be baked into stock prices and A little bit of catch-up, of course, given the kind of return of markets. Hong Kong, Taiwan, and everyone else, I think, have continued to see some pressure. But overall, the point being, it hasn't really spilled over into Western markets. So one to monitor going forward. For oil traders, one thing, the implications, of course, is that the more that economic growth falters and in GDP gets impacted by the significant kind of impacts of activity in mainland China and beyond, then demand for crude has got to be kind of reviewed in respect then that, you know, yesterday we were hearing from the Chinese government economist that was talking about potential implication of around a 1% GDP loss, taking growth in China down to around the 5% region. And that would be, you know, lowest kind of levels that we would have printed in Chinese growth since around the early '90s. So quite, quite unprecedented, but I would say certainly not unexpected. Growth in China has been slowing for a long time, and Wall Street estimates are for an equal-sized impact as things stand at the moment in terms of the virus is concerned. Now, one thing this is leading to, though, is there's actually an OPEC meeting. So when all these oil exporting and producing nations gather, that's set to happen at the beginning of March. But given this kind of unprecedented situation with the outbreak that's materialized with the coronavirus, that they're trying to bring that forward. And according to the Algerian minister, potentially that meeting could happen next week because these oil-producing nations will be very mindful of the fact that they will want to be getting ahead of any potential downside issues, particularly on the demand side. That might materialize and manifest almost if the coronavirus gets worse. I know Sam's gonna look at these charts, but just looking at some of the near-term price action, we're not actually that far away from quite a key bottom end of the range of which we've been seeing for this week. And certainly this is the reaction to the reopening of trade and the virus. We gapped down in equities, we also did gap down in oil, and over that period period on that one very brief open on COMEX overnight session. We did print a low at $52.15 and we're trading about a 30-cent range of that at the moment. So definitely worth keeping an eye on today. But yeah, the oil ministers will be mindful that perhaps they might want to take action, deepen the cuts just in order to mitigate the potential weight that could happen in the price. And obviously that's, that's not a good situation for a lot of these oil-producing nations where they're their general fiscal breakevens are being squeezed down at these low 50s, never mind if we start to break into the 40 handle. Okay, a few other points, um, just generally, as you can see if you were looking at your charts back to the Fed last night, there's not a great deal of movement overall. I guess the one— equities were pretty unfazed, pretty similar in the currency market. If anything, gold was edging up and And T-notes remain pretty well bid here in the bottom right. My overall assessment of the meeting last night was it was a relatively dull affair. If you did join us live last night, I tried to make it as exciting as possible, but I'm afraid that's just the nature of it. It was very much going to be a wait-and-see meeting that kind of materialized. The one potential soft dovish hint that came and perhaps has underpinned that that rise in T-notes is that Powell said this idea of tweaking the statement, hinting at a greater resolve to hit 2% target. And the Fed chief saying the FOMC are not satisfied with the continued undershoot. And what this would mean then is that there is dovish in the sense that, well, how do you promote that? Well, you use looser monetary policy to try and stoke inflation. And so that was a kind of subtle hint towards possibly that. and that might explain it. But otherwise it was pretty, pretty vanilla. Trade uncertainty has eased, he said, though it's not disappeared. Global growth looks to be bottoming out with the economic fallout from the coronavirus still a wild card. So he didn't really say much about that at all, but that was as expected. There's not much evidence here for him to make any real accurate assessment of it and its overall implications just yet. Technical tweaks to raised the interest rate on excess reserves. That was nothing really unexpected. And then they said they're going to extend repo operations at least through April, and that fits within the timeline we already know. So I'm not going to talk about the Fed anymore. It's come and it's gone, and we move on. The main event then for today definitely is, um, the Bank of England, and it's set to be quite an interesting one. And certainly it's going to be one where I'm going to do a full kind of breakdown of what to expect and a bit later on this morning. But quite interestingly, people already seemingly getting a little ahead of themselves here. The pound already coming under a little bit of downside pressure. You can see just broken through yesterday afternoon's low and we're just bringing into target now the low that was seen 2 days ago on Tuesday. We're just testing that now in the futures. So obviously there's a risk, if anything, here is we see, we see the first rate cut in a while and that's what we're going to discuss. And I want to show you this one first. This is a— let me just transition my screen. This is a change in expectations towards essentially markets' expectations of what the action from the Bank of England could be. And this is looking at, on the right-hand side, the percentage probability that the Bank of England cut interest rates. And so this black line would show that throughout really all of 2019, the probability of the Bank of England cutting interest rates was, was sub-20%. Now, one of the things was we started this year and that remained the case. If anything, it was even lower. Because if you remember, obviously Boris Johnson managed to secure a resounding majority, and that, if anything, kind of saw risks diminish on the near term at least about this kind of disorderly Brexit. Because as we've seen, the formality is, is that the UK will leave the European Union as of this Friday, and we go into that implementation phase. But, you know, it's all been relatively smooth thus far. The hard work's yet to come, so to speak. Speak. The problem what you've had though is that economically the UK economy has continued to suffer, and the hard data, uh, things like GDP as you can see here, uh, have been weak. Manufacturing, industrial production, the PMIs generally have all been softening, construction through manufacturing and services. And then you had quite an interesting interview by Gertan Pfleger, who was particularly dovish and that did see quite a big, uh, pop then in people increasing their bets that the Bank of England's got to take more immediate action. So this is that kind of forward guidance interpretation from these BoE speakers. Retail sales inflation data was kind of the peak of that. We actually got up to around a 70% chance of a cut only around 10 days ago or so. However, since then, some of the more forward-looking soft data particularly, uh, the latest PMIs have seen a bit of an about-turn because that now encapsulates the period post the election. Uh, and generally then, if that's forward-looking and it's showing indications of people getting more positive about now the economic future, well then why the needs to cut rates now? Uh, why not better to see if whether or not that does indeed materialize economically because they're soft. That's our expectations and our confidence about the future. So better not to perhaps wait and see. And what this has led to then is a repricing of this, and this is looking at basically short sterling, so shorter-dated interest rate futures. And as you can see here on the right-hand side, this is where rates reside, of course, in Britain at the moment, 0.75%, and there's a 55% probability that they're going to remain on hold. There's a 45% probability of a cut, but as you can see here, uh, this is kind of worst-case scenario as far as the Bank of England are concerned. Because if you think about it, forward guidance and its objective is to be as clear as possible so that markets can be as prepared as possible, so that if there is any type of policy change or tweak that it can be digested in an orderly, calm fashion that does not create unnecessary volatility in markets. But what this is telling you is that it's an absolute coin toss, uh, and markets are very undecided here, which means then, as we're going to explain later, that initial release of when the information comes out and it's going to be hold or cut, and then the vote split— that those two pieces of information that come out first are going to see absolutely wild movement in the pound in either direction, whatever they take, because at the moment the market is not prepared in one way or the other. So definitely, you know, it's going to be a really volatile initial move, and overall I would say you want to stay out of that because it's going to be incredibly messy and noisy. And then it's about the accompanying moves that happen thereafter. Don't forget there's more detail in the statement, there's the minutes, then you've got the monetary policy report and the press conference. There's a lot of things going on throughout the, the period of the hour thereafter to look out for. So don't get the FOMO when the market explodes on the breakout. Then, as Sam's going to look at technically, it's almost as if the pound's been just, just simmering, waiting for this, this event. And so it's got to be tackled with a bit of caution. If they did, and, and on the vote split is obviously going to be quite key, and I'm going to show you something in a second. But this looks at the voting patterns of the Bank of England, uh, over the last several years. And as you can see here, obviously the usual decision has been to keep rates as they are. There has been the cuts that happened in— you remember, in the period thereafter the surprise e-referendum vote. And then we've had the rate hike, of course, that came on the kind of slow reversal of emergency low rates. And so you can see the actual descents are very rare. It tends to be quite close to either outlying— you have two outlying hawks or doves, but generally a fairly large cluster. So it's quite an unusual situation to be where, where we are. These are the, the individual candidates that comprise of the MPC. And so as you can see here, I don't think it's much of a surprise given the economic situation generally in the UK. You can see that overall there is a tilted bias to the doves, and the likes of Jonathan Haskel and Michael Saunders have been dissenting members for a while. They've continued to buck the trend of the group by voting for an immediate rate cut for several months. Now, uh, Flieger is the gentleman that was in the FT a few weeks ago that was very dovish, and hence the reason why he's over on that side. And then Silvana Tenreiro has also made some dovish comments as well. The question really, I guess, to tip the balance is, well, I guess Mark Carney. It's very rare for the governor to really break out into the smaller group. The governor tends to sit then with the, the general larger majority, but in this case it is right down the middle. So Could well be then though, if Mark Carney goes one way or the other, that people like John Cunliffe will go with him, and then that, that decides the balance. Now for me, what, what do I think is going to happen? Uh, well, for what it's worth, I think the Bank of England will hold interest rates. I do not think that they will cut. Um, I think actually it's going to be really close though, um, the closest one in a long time or recent memory. I do actually think that it's going to be 5— these 5 chaps here are going to say we should hold, and I think these 4 are going to say we're going to cut. I think if anything, I think the most probable scenarios are either 5-4 or 6-3. Uh, so Tenreiro is maybe the perhaps the one that's a bit— could swing either way. But I do think we're going to hold today. I think better tactically for the Bank of England, I think this will be the overarching mindset that they wait to see whether or not the, the positive bounce post-election from a sentiment point of view and the soft information we've had holds true, and also how Brexit starts to unfold as we start to get in the crux of the trade deal with Europe and other trading partners. I think they'll want to keep some ammunition. Now that's all well and good with the vote split. Remember, the vote split will determine the initial severity of the initial spike if it was to be 7-2— and I'll explain this, I'll get my, my chalkboard out later— but if it is 7-2, that would be in a sense incredibly hawkish for a hold in that sense, and you get a big spike in the price. So the actual split composition is going to be quite key as to that first move. I did do a quick poll, it's only about 60 votes, so I wouldn't read too much into it. But I put it out there this morning just to the general Twitter community. What do you think is going to be the course of action today? 7.2 hold, 6.3 hold, 5.4 hold— you can see that's where I'm going for— or a 5 or 4.5 cut. So they actually do cut rates. The most probable according to, uh, you guys is that they're going to do a 6.3, and I'd say that probably is the, uh, the actual Wall Street average of what they think the split will be today. But again, it's more than just this. This is only one part of this. The actual trade— more tradable part, I think, is beyond the spike and what they actually say thereafter. Goldman Sachs, HSBC, Morgan Stanley, they think there's going to be no change today at the Bank of England. Deutsche, Barclays, NatWest, they're all predicting a cut. And one of the things you're probably going to hear is that if they cut, it's probably going to be cut in rates but a fairly more hawkish commentary to just signal that, look, they're not in ultra-accommodative mode yet, they're just looking to just tackle, uh, the recent situations unfolding economically. But if they do hold, it's probably going to be accompanied by a relatively dovish monetary policy report. Again, this is the management of market expectations. Okay, moving off that, a quick run-through of a couple of earnings reports. I did tweet all of these from the Amplify Trading account this this morning, so I'm not going to go through all the details, just going to give you a very brief overview. Basically, Tesla shares are pretty much parabolic at the moment. I got a chart sent to me from Will last night when their earnings came out, and I thought I was looking at Bitcoin, but it was Tesla. And Tesla, Tesla basically up another 6-7% last night. You know, their share price has just gone crazy. In the recent few, few weeks. I think everyone needs to just do a little Cisco shakedown, Elon style, and apparently shares just rocket higher. But yeah, Tesla really strong last night, Microsoft equally so. Microsoft shares were up about 4%, again exceeding earlier all-time high. Quarterly revenue topping estimates by more than $1 billion, again winning some really big flagship cloud contracts. The demand on that side continues to be incredibly impressive. Facebook, though, the opposite. Facebook shares actually fell about 7%. Yeah, social media network user gains stagnating in the US and Canada. Revenues increased, but actually it was a— in looking back in previous quarters, quite slow pace. Still a lot of pushback on general regulation, regulatory environment, to their privacy concerns and so on. Other earnings in Europe, it's also been equally busy. A quick run-through: BT down about 5%, Shell down about 3.5% at the open, adjusted net profit miss. They've also slowed down their buybacks. Deutsche Bank down 2%, LVMH negative, Unilever maybe a slight initial sweet spot at the open, up about a percent. So earnings season definitely in, in full swing at the moment. Calendar-wise, obviously the focus for us is really the Bank of England. Before that, you do have a couple the, the German state CPIs. A couple of those have already come out this morning. And to give you a flavor, Saxony -0.6%, it's on the month-to-month reading, but the Saxony year-on-year 1.8%, up in the previous 1.4%. Um, so yeah, keep, keep an eye out for those. I mean, that's a, that's a decent lift, uh, month or year-on-year basis, uh, that might provide a little bit of support for the euro. Let's wait and see. You'll get the others— Brandenburg, Baden-Württemberg, Bavaria, Hesse, and the rest— coming out all the way through up until 9 AM. They've got the German unemployment change and rate worth keeping an eye on. Doesn't tend to be that market moving, but certainly as per usual rules apply, anything on the outlying stretch of the range needs to be, needs to be monitored. You can see though the range for the unemployment change is very wide, uh, -29K to +15K, expectations for +5. As I said, Bank of England really is, is where it's at for today as the main event. And then also this afternoon you've got the advanced reading of GDP coming out of the US, which is going to be particularly interesting. Remember, this is the advanced reading, so this is the one that's important, that will be potentially market-moving. Expectations are, if we look at US GDP, that basically it prints the same as it has done at 2.1%. However, you've got a range of 1 to 3, and as far as GDP data is concerned, that's a fairly wide range of estimates. So definitely 1:30, that's going to be quite key. That's alongside the regular weekly jobless data, but really that gets brushed aside as people will lock in on the GDP number. Um, that's what I'm going to talk about actually. I'm I'm going to hand you over to Sam. I think that's enough from me. And let's hear what Sam has to say from a technical viewpoint. Okay, thanks very much, guys. And I'll see you for the Bank of England later.

Yeah, hi guys. Looking forward to the Bank of England later. The pound this morning actually just coming under a bit of pressure. Whether you want to get involved and trade this before the announcement or not, I'm not too sure, but let's have a quick look. Set that long-term chart. The bottom part of that trend line just coming under a bit of pressure now. Where we close the day will be key, uh, and the chart will, will tell you really what happens, uh, and almost be able to tell you the vote as well. If we have a look over at this trend, you can see, you know, depending where you take it now, we're almost bringing in this, uh, one just using the bottom of the, uh, the 8th of November and the 27th, just testing that. I know this one we had on before was really well respected. We couldn't close below it, and again, didn't close below there yesterday, but certainly testing, uh, that and 130 now and all those lows. I mean, what an area of support it has been. Does it go today or not? Time will tell. A break of that, just be aware of all of these, you know, potential lows where price, you know, could get to if, uh, if we were to have a, a way more dovish, uh, result on that. If it holds, just put it on to 60-minute now, and you can see here quite a key resistance point just over the last couple of sessions around 1.3046. Certainly a level to have marked up there. We'll go through all of this, of course, ahead of the announcement. There's a couple more key resistance points, 1.3060 as well, that I'd be wanting to, to have marked up prior to, to that release. And then we've got a trend line coming down from the top as well, price really getting squeezed. And you can see here already just a little reaction to that trend and the low that we had from the week. And even below there, obviously you've got all of this area of support. So the pound, uh, I'm not too interested in point in trading it now. It's a wait and see and prepare as much as possible for that. The euro, uh, finishing yesterday, uh, well, I would say the fact that we finished above, uh, the low that we had back on— what day is it? When? Thursday? Tuesday is quite key. However, we are still in this bit of a trend channel, if you like, over the last few days. So I don't think enough just yet to get too excited about wanting to buy. We're just coming to the top end of the, the morning range. You can see here the high that we had during the Asian session overnight. We're just testing that now. The lows are in place as well. It's a small range, only 12 ticks or so, but quite a key level. 10, uh, 110.48 was also the high yesterday morning, uh, as well. Above there, just of course be aware of that FOMC see a spike off the initial dovish reaction there to come in. But yeah, I think the, the euro, because of— I'm just putting this back onto the weekly chart— because of just the key levels in play, those trend lines, the dollar index as well, as Alex was saying last night, is a bit overextended. We could be in time, just getting ready for a bit of a pullback here. You can see those, the trend lines here on the daily. Again, can't close below those. It wouldn't be too much of a surprise to see a bit of a retracement. Not saying I'm going to be looking to necessarily buy the euro, but preferring, I think, to sell this market a bit higher up, uh, would be, would be would be what I'd be looking to, to go for. Having a look over, uh, US equities, uh, this morning's coming under a bit of pressure. Let me just bring in, uh, that chart. You can see here on the daily, back down towards those lows. And well, I mean, what a, uh, what a resistance that was there on the, the gap close. Uh, just shows, you know, how important these levels are, you know, you can say whatever you want about the fundamentals. Above that, you get a, you know, a decent rally higher. The fact that it holds, well, why on earth would you want to be looking to, to buy if it can't do that late last night? And we were doing the, the FOMC and we're saying, you know, because it's so, uh, slow and such a non-event, do not get long unless you get that 15-minute close above. And you can see it absolutely did not do that. And of course, that is a nice reversal, uh, to come in. And, you know, whether you took that on or not, if you did, fantastic, you're, you're living the dream right now. But let's have a quick look at some levels below where we're trading. Really, it's a bit of a zone. 32, uh, 32 is the bottom, and then you've got obviously the lows that we're trading at now for around 32.45 and a bit. A bit of a trend line did break yesterday, so if we were to have any retracement into the morning afternoon. Just keep a watch on any point that could come back there. If we have a look longer term, you've got the level market, uh, that could come in around 32.18, bit of a horizontal support point. And then the spike, the low of the year, 31.81, as well, you'd look to have on there. And of course, these trend lines you can see if I just bring that in already chopped through. But that longer term one— and this is where, you know, there's arguments to buy little dips here and there. I don't think it's a market where you can necessarily hold, uh, for a longer period of time just because they're uncertainty. But I absolutely would love to see an opportunity to get anywhere in and near 3,100. Of course, that's a still a long way away. Um, so maybe 3150 or 3181. Again, that low of the year could be the opportunity, perhaps. Having a look over gold, dropping it down 60 minutes. Uh, the market that doesn't want to go down at the moment, really resilient to, uh, any push lower. Got quite a lot of resistance up where we're trading though, so perhaps just have that, that patience. Even if that R1 goes, just be aware that you do have the high from, uh, the 27th evening, and of course then the, uh, 28th as well, just on that. So a bit of a resistance zone, if you like, before, uh, looking to get in. Just because R1 breaks, I wouldn't be looking to buy, put it like that, especially given the morning. Uh, the way it's traded recently though, you can see it breaks the high, comes back and retests that. So a nice sort of wave higher at the moment. Trend lines from the lows, you can see here, would also match up potentially with the previous high from yesterday around 1579.8. That'd be something I'd be, be half interested in, uh, there as well. Oil back down to the low, just printed, uh, there a new low for the day and having a little bounce on, uh, the low from the, the 27th low from the year. Looking at this on, on that daily, um, we were saying, you know, is that the low in? I, you know, unless it was to get above I think it was one of the resistance levels or previous lows. I wouldn't be too confident about calling that, but I think if we can get down towards here— let's just mark that area around 51s— I do quite look like the idea of, as long as the price action suggests it, that this could be the bottom of such a key level. However, if you're, you know, bearish, a break below there could really run down and see a big change in this market. But yeah, I like that area to, to find some support. Support. Let's have a look, 60 minutes, just have a, a quick bring in of the pivots to give us a bit more of a sense of direction over the last couple of days. You can see we double topped yesterday, we filled that gap as well in early trading, couldn't really confirm a breaker above any of those levels. And like the US equities, we've drifted lower, so keep a watch on those lows as well. 15-minute trade chart now, let's keep a close watch on yesterday's low, which is actually some nice resistance. You've got quite a lot of levels that we just stalled before breaking through, and of course on the way up they could offer levels of resistance on that retest as well. Probably by the time we do— if we do, I should say— push high, there'll be nice trend lines in play that could guide price action. But for me, $51, $51, and then a few cents either side For me, looks like a nice area we could find some sort of support today. Likely to be dominated by the pound from midday, but it will also be interesting to see— see— interesting to see what the stocks do. Dow down 200 this morning, but has much changed overnight. I wouldn't be surprised if we see a bit of a bounce. The DAX here hit that low, uh, the coronavirus low if you like, and has had a decent enough bounce from there. If that is to break we got these lows, uh, from beginning of the year as well to start to point in. Hope everyone has a good morning. We'll catch you all, uh, just before midday to go through the Bank of England. I'm looking forward to it. It's set up nicely to be one with good opportunity.