Bank of England Set To Hold Policy With Focus On Negative Rate Discussion

Okay, very good morning to you. It is Thursday the 4th of February. Hope you're doing well. In this briefing, I'm going to take a look at this. We've got the Bank of England interest rate meeting and press conference coming up later on today, what to expect from that, how the market might react. And we're going to have a look at some Fed commentary. We've got an update just generally on some key levels technically to have a look at across different products that have been in focus across the different asset classes. And yeah, a few US data points and other catch-ups, including the likes of some of the movement in Italian assets following the appointment of Draghi to try and form a government in Italy, as well as looking at some of the metal space like silver and gold as well. So let's get straight into it and start looking at the charts. What is going on at the moment? Well, uh, Dixie continues to remain firm this morning, and in fact it's broken above what was a bit of a cap to price activity in the last two sessions. So definitely worth keeping an eye on there, which is a theme generally of prevailing dollar strength. Now I've had quite a few questions, you know, why is the dollar strengthening? And to be honest, I don't really have a definitive answer. I just prefer to be just tracking it. It is leading, um, at least dollar-based currency pairs at the moment, more dollar strength than any other narrative coming out of the other currencies. And I'm just kind of following what I'm seeing at the moment. And a technical break here up again in the dollar. The Dixie's trading up about a quarter of 1% this morning. And we have had things like the US House voted to pass the budget plan which fast-tracks President Biden's stimulus plan, so using elements of the reconciliation process. But to be honest, that's been, um, something that's been known for a while. I don't think that's a key catalyst on its own for, for the reason of dollar strength. But as I said, nonetheless, it does bring into play then some interesting, um, currency movements in the major pairs. And just looking at EURUSD here, we're having a retest down at the low you can see from, from yesterday. So this on the longer higher time frame is, is quite a key area. This 1.20, as we know, has played a real key role in the euro in capping price gains. Originally it was that kind of I guess, marker that the ECB had put down back in kind of Q3 of last year to say, look, we're starting to get a little bit concerned about the strength of the euro. That hasn't really come to the fore until recently, having moved up kind of towards 1.24. And obviously we had some of that recent commentary just a week or two ago from sources, and ECB's not talking about the idea that they could do more to loosen rates and so on. Um, but really it's more dollar strength is pushing this down, and I'm just quite interested to see how we react. We're within obviously touching distance now of that key level of which I think is going to be very important here for the euro. Um, consequently cable as well trading a little heavy this morning. So, you know, cable having been largely cushioned to a certain degree here from some of the action just given the general improvements that we've seen in vaccinations being administered in a fairly on-track fashion from the UK government, the price has started to break down a little bit. And as we've just moved down below then the, the kind of price movement that we'd seen from the beginning of the week, so going back to the 2nd, then we've just had a nice kind of cap to price and a test. So here just looking at this low that we printed on the 2nd, and we've come up, just briefly tested that this morning before then a bit of a move down. And that does coincide with the S1 today, so quite a nice area of resistance looking on a 90-minute chart here to provide a bit of upside resistance to any recovery in this price. And now on the downside, key levels now watching here in cable, we're just testing down towards these lows that we printed back on the the 19th of January, um, has failed at the moment on the initial test here, which does coincide as support around the 136 handle in the futures. So that's something again to keep an eye on. Any breakdown there, you've got the S2 just below, and then you can see technically there's not too much in the way of near clear support until we get much further down towards the lows we printed back on the 18th at 3528. So if we do get that dollar continuation with the euro breach, let's say, from yesterday's low. And if it takes out through 120, um, this could provide headwinds for, for cable to continue this downward trend we've seen materialize in the recent few hours. So again, it's not so much I'd say that it's tied to news in this move, it's more just trends that we're seeing at the moment that I'd be following. Obviously you've got the Bank of England later and we'll talk about that in a moment. and that could provide some degree of catalyst, but we're not expecting any policy change or anything like that. It's more about the commentary on negative rates that people will be focusing on, but we'll get to that in a moment. Otherwise, other charts in, in focus, uh, oil markets, despite the relative bearish DOE release, really couldn't hold prices down. And I really think that says a lot about the general bullish sentiment for oil at the moment and You know, yesterday afternoon we just continued to move higher. This was some of the volatility on the initial dip we saw, um, given that the DOE's weren't as deep a draw as we saw on the prior night's APIs. But then we recovered very quickly. We actually put in the high of the session, and that is again the 12-month high, up at around what would have been a price point at 5633. And you can see I'm just keeping an eye here on a short-term trend line on these highs that we've had both yesterday, the Asia-Pac session, and so far this morning. But as I've been looking at tracking on the higher time frame daily chart, we have reached that target. You know, this is what we were talking about right at the beginning of the week. If we could break out above a test on that 20th of Feb high, then the next levels of resistance we didn't see up until the kind of really 55.95, 56 handle and just above, which is exactly where we're at at the moment. So again, quite an interesting area for oil because if we do start to break on up above this area, then really I don't see a great deal of resistance until next target up at around $57.36, which would be another 25 cents or so above the current price. Otherwise, elsewhere, equity markets are pretty flat overall this morning. The NASDAQ futures center here, you can see, is marginal outperformance That's because it underperformed at the cash close on Wall Street last night, albeit marginally down 0.4% against around 0.1% gain in the S&P and the Dow. Yesterday's kind of slight— let's say I kind of classify it as a slight pause for breath given this kind of very decent recovery in equity markets we've seen since the beginning of the week, totally reversing any of those losses that were seen middle of last week on that whole kind of short squeeze mentality. That did reverberate at the time, um, last Wednesday into a bit of downside. So all of that's been taken back, and I think still feel relatively comfortable with the consolidation that's happening at the moment. I think it's appropriate. I'm just kind of waiting now, marking out recent technical ranges to see for the next move in equities, but don't really have a lot of fundamental rationale to think that we're gonna snap lower, not unless anything unexpected, uh, new breaks. So probably looking for some consolidation at the moment in the indices. T-notes been grinding a little lower. Obviously we had some really strong numbers yesterday and some data points in regard to the ISM figure. Obviously we've got some more data coming out today, jobless and factory orders. So yeah, yields moving a little higher of late in the US. Not that I think that that translates into any definable action from the Fed, because there's been quite a lot of Fed rhetoric, which I'll cover briefly in a moment. But the 10-year down for the time being, albeit marginally, but continuation of a very grind low or move lower we've seen materialize over the last couple of days. And we're trading down 2 ticks this morning. Otherwise, metals markets, just want a quick comment on gold. Gold has been feeling a bit of the weight of the persistence— persistency of the dollar move at the moment. And one of the ranges we've been tracking for a while is, again, looking at a 90-minute chart here, this kind of range that gold's been in. And yesterday I was kind of stressing to the guys that, look, need to keep an eye on the bottom end of this range because if it breaks, the market could trade quite heavy. So it's exactly what we've seen materialize in the, in the overnight session. Um, so for me, it's— yes, the dollar strength is not helping this, but the technical breach and having had multiple tests here in the last couple of sessions on around the lower end of that range just giving way and adding a bit of downside weight. So gold trades down $13 this morning on the back of that. And then silver obviously was a massive talking point at the beginning of the week. That's kind of faded as the week's gone on. And just kind of tracking the price here now on a kind of relative range. So you've got the previous— well, you can see here the low that we had on the initial test down toward the gap fill that we saw back at the beginning of the week, the snap through, retest, retest. And you've got the R1 today at that same level. So I think you've got a really nice area of strong resistance now on the upside for, for silver. Um, in the interim, the kind of midpoint stop before we'd get up there, you've got the pivot level. You can see the market's respected that in the overnight session, and that does coincide roughly with around some of the late US trading hours, um, highs as well. On the downside, again, a nice double bottom here to keep an eye on should prices start to continue to trend lower, as what we saw materialize during the overnight session. That would be at $26.35. So just looking at that range at the moment for, for silver prices. All right, let's get into some of the news. What is going on? Other things to be aware of. And just a quick word then on Italian markets. The FTSE MIB actually put in the local index in equities, the best performance in 3 weeks yesterday. Gains I think were just over 2%. We saw that big gap up in BTPs obviously yesterday. This all coming on the confirmation that Draghi's being kind of collared to come in and try to form a government. Still a lot of work to be done there and definitely not a definitive done deal by any stretch of the imagination. But that was just looking technically at BTP futures Uh, you've got this area, a double top from the 28th and the 1st of February, and that marked then the kind of low end of the initial test of the range that we had from yesterday's session. Had a brief flirt through that level at the initial open this morning. That's definitely an area that I'd be watching, is around that 54 mark in BTP futures. If we did move below there, then that does open up the prospects of a continued drift down back in toward that range we were seeing before the Draghi confirmation came through. I kind of feel like that will eventually happen. We will move back below this kind of key level, given the fact that I think the market's got a little bit overly excited about the whole Draghi situation. You know, reality sits in. It's not as straightforward when you start looking at the kind of the power struggle at the moment and the jostling for political positioning and and what Draghi needs to do in order to make the numbers work, in order to get a government over the line. So that being said, the longer that takes, the more I think yields will continue to move slowly back up in Italy, just putting a bit of downside pressure on BTPs. Um, just having a look then, some Fed commentary I thought is worth touching upon because definitely when we start seeing some solid data points come out of the US —like we have done to a certain degree this week—people start to get a little bit apprehensive again about things like inflation. And, you know, the Fed, are they going to have any discussions on tapering in the near future and so on. So it's always good to get a bit of a status check, if you like, on where the Fed's heads are at. And you can do that by obviously monitoring their speeches. Now, there was two speakers that came out notably yesterday, Fed's Bullard Um, he said rising US stock prices do not raise financial stability concerns, and there is no hurry for the central bank to slow its massive bond buying program. So definitely policy is not going anywhere anytime soon according to Bullard. But I must note, Bullard is a non-voting member. A voting member, so perhaps a little bit more influential, was Fed's Evans. He said that monetary policy will need to remain super easy to boost too-low inflation, even as prices are expected to temporarily spike this spring. Again, I thought that was quite timely given the fact that the service sector activity survey yesterday in ISM might have gone some way to reignite fears about this whole inflation overheating. But again, Evans clarifying that this would be temporary at this point in time, and, and being a call for super easy policy to remain in place. So, um, that in itself I think is an important general top-level reinforcement for why equities I don't think would see anything other than small little profit-taking periods when equities have risen consistently over a period of time. So any pullbacks then, generally I think you'll see people buy into them, and then we grind back up and all-time highs back on the cards for sure, given the nature of what Evans is really saying, which I think is definitely a shared stance of the, the main kind of Federal Reserve view at the moment. All right, quick, quick word about the Bank of England then. What's going on here? I'll give you a kind of summary. I'll go over everything in great detail on the Amplify live stream later, but we're not expecting any policy change. So rates at 0.1%, the asset purchase facility at $895 billion. There's no need for them to make any moves on their major policy tools at this juncture. The MPC definitely, you know, if you think about it, if you were part of the Bank of England, you know, how can you really at this point make a decision to move policy when you're awaiting the government's fiscal plan to come out at the beginning of March, which is their budget? As we've seen through what's going on on Capitol Hill in Washington and elsewhere, this is a coordinated, almost, effort in order to support an economy through fiscal and monetary means. So at the moment, the fiscal kind of leads it, if you like. They, they work on their own steam, and for the MPC, they have to just react to what gets, gets announced, it gets done, to factor that in. So they've got to sit on their hands for the time being because of really that reason. The other thing is then Um, they're going to release their quarterly money— monetary policy report. So this is what comes out, um, every alternate meeting, and it allows us in markets to have a bit of a greater insight as to the forward guidance that the bank has at this present point in time. The last time they issued this was back in November, and obviously the world was a bit of a different place back in November. I would say if anything, COVID numbers got materially worse than expected, and subsequently that's led to longer and more onerous lockdowns than expected back then. And so, you know, things like an upgrade— well, an update to GDP forecast, which will probably materially see a weakening of what Q1 growth estimates look like, is going to take place. But how much of a surprise would that be? I'd say very little at all. So not really looking for too much there in the way of surprises to really act as a catalyst for price movement in sterling or other UK-based assets. On the forecasts. However, the one area of interest, of course, is so much persistent talk about negative interest rates. As much as I really do not see that as anywhere near being imminent requirement, given the current status of what's going on in the UK, you know, one of the major things here is the general success the UK has had in its COVID 19 vaccination rollout. You know, the kind of move to having a heavy gearing towards the AstraZeneca drug, which has proven to be a, a good strategy, has then yielded results where they're on target now to hit that mid-February target of inoculating enough people in those key at-risk demographics, the older age group. And so That could mean then that we, we might see a decent second half recovery in the UK economy, all things remaining equal. And with that being said then, there's absolutely no need to be moving the needle now in regards to adopting a more dovish stance. So I guess the main thing to look out for here is that the bank has been in discussions with numerous financial institutions about a feasibility discussion on negative rates. So the kind of necessary due diligence before adopting it would be to explore the implementation and the ramification if it were to come into place in future. So it's part of a strategic planning, let's say. But that in itself can be quite a powerful thing for markets. You know, a risk that's a credible tool on the table to be able to be used in future— could that be enough to actually not use it, if that makes sense? So yeah, overall for the Bank of England, the main risk then is going to be the kind of insight, the depth of commentary on negative rates. I guess the more that the research might show that it could be implemented very easily, it could, you know, anything that would signal it could be quite a successful thing to adopt given it's never happened here in the UK, that's probably only going to fuel the flame that it's going to happen. Even though I think all those previous things I've said still stand. The market will just jump on the headlines, but ultimately I think beyond that, the realization is, is now is not the time to be taking rates negative for all those aforementioned reasons. So that's what I look for, for the catalyst. But as I said, probably I'm just keen to look at the dollar and further appreciation there. And if the euro breaks 120, cable just could get caught in those headwinds and start trading a little heavy. On the back of the greenback strength. All right, calendar for today. What have we got? Um, so pretty quiet morning. Uh, construction PMI of the UK is not going to move, move sterling. Uh, construction, probably the least important of the, the PMI metrics that we've seen. So then you've got Bank of England coming out at midday, and then leading up into non-farm tomorrow, we've got Challenger layoffs, then you've got weekly jobless claims expected there, 830,000. Not too dissimilar from the prior week. Then you've got later the revisions to durable goods, but again revisions, so this will be non-market moving. And then factory orders might get some attention, expected at 0.7% from 1% previous. That'll be at 3 PM London time. Speaker-wise, Fed focus again. Uh, Daly, a voter, at 7. Kaplan, an hour before, non-voter, speaking on the economic outlook at 6 PM London. And, and that's it for the morning briefing. So any questions at all, just feel free to leave a comment. I'm happy to help. Otherwise, I wish you guys a good day ahead. Thanks very much.