What to expect from the BoE today

I will talk about kind of overview of the news from a fundamental perspective, and then I'm going to hand you over to Sam North, and he's going to talk you through the charts and a couple levels that he's looking at as well. So kicking things off, just to give you a bit of an overall assessment of market sentiment this morning, just derived from the kind of cross-asset class mix I've got up on my charts. You can see top left both EURUSD and cable have been grinding lower. So it comes amid a slightly firmer dollar, kind of repeat really of yesterday. We were talking about this, Sam and I, a few days ago in that, you know, obviously there's been a dramatic U-turn from the Fed and that did create a lot of dollar weakness. But it almost feels like the market's kind of now priced in that new direction, if you like, from the central bank. And so now you're getting a bit of a return back of some dollar strength. And of course, that came after the payrolls as well. So underlying is still fairly healthy situation in terms of economic growth, albeit it had looked fragile at the end of last year. So dollar strength continues, and with that in mind, actually, we did have some comments. Jerome Powell, of course, the Fed chair, did speak overnight, and he did repeat that actually the US economy is in a good place, remains in a good place, and has proved resilient so far to shocks like the British decision to leave the EU. Also said that low unemployment and inflation is near the Fed's 2% target. So, you know, this doesn't sound like a guy who's panicking or is going to go uber dovish. If anything, I think this is a little bit of management from a communication perspective from Powell, where the markets have obviously a lot of talk about the Fed's dovishness. He needs to rein that in a little bit. It's like, well, just hold on here. You know, we are pausing. We're not rate cutting right here. And so, yeah, maybe a little bit of a reason that could arguably support a bit of further, uh, dollar strength this morning. The DXY is up about 0.2%. Otherwise, equity index futures relatively quiet, so marginally lower. It comes after quite a mixed performance overnight in the Asia-Pacific session. I think SoftBank, which is one of the larger Japanese shares, surged higher overnight, but we got a bit of weakness seen in other geographic regions. I should say countries. One thing to be aware of is the Reserve Bank of India, the RBI. They did actually cut their benchmark interest rate by 25 basis points overnight. Their interest rate now actually 6.25%. So it's just quite amazing when you look at these other kind of emerging markets, in particular in comparison to the developed markets in certainly UK and Western Europe. So a cut from India, their equity markets locally have outperformed in, uh, comparatively on a global basis. This does come though ahead of Prime Minister Modi making a final push for economic growth ahead of— and this kind of why it makes sense— there's upcoming parliamentary elections. And of course, economic prosperity is very key to popularity in terms of policies and so on. But moving on, Fixed income futures marginally higher with the slight softness seen in the equity space. Crude oil, not a great deal going on, marginally lower, about $0.26. As too is gold, down about $6. Just probably a byproduct, I think, more than anything, of a bit of the dollar strength since Europe's come into market. Going back to the pound then, the center chart, we have— having broken through that 1.30 level a couple of days ago, we've continued to remain on the back foot. And this morning that has continued. Cable slightly underperforming EURUSD. And we can see, I mean, Sam's going to go over this obviously in much more detail, but that just a very clear near-term support point. You can see on 3 prior occasions the confirmation of the break of that has led to a decent run lower since we've stepped into the market today. And we now trade below that S1 level. And after breaking that, it did spike lower to come back for kind of that classic pullback, if you like, to recommence the short at that point. Now, you know, why is this happening? Well, as I said, I think the dollar is a large part of this, but from a sterling point of view— and this is important for the directional bias for cable— I do think over the next week or so I do have a short bias overall. This is based upon what we've just discussed with the dollar, and also the fact that it's looking ever more likely that Theresa May is not going to have an amended deal of any substance to bring back by the 13th of February next week, meaning that essentially she misses one of those self-imposed deadlines about bringing a revised Brexit deal back to Parliament. This then means then the kind of show goes on And it looks now, according to some of the press, that it could be— we'll get into a Telegraph article— that it's going to be towards the back end of the month. The more the timeline to March 29th diminishes, the more the prospect of a no-deal starts to increase, and therefore it acts as a negative headwind for the pound. This, of course, coming with the dollar appreciation, and hence that bias for the more short position. We'll get on to this in a second. I think when I say that, that doesn't mean I'm short right now, or I'd suggest that, because obviously you've got the Bank of England later, and I'll get into the reasons of my thoughts behind that. Now, a couple things on the Brexit side to be aware of. You probably saw this tweet, uh, yesterday. Uh, EU's Tusk— this is a genuine tweet, you know, I'm not making this stuff up. I am looking forward in 20 years' time to the Brexit movie when it's going to be— if there is still at this point Leonardo DiCaprio playing Donald Tusk, it's going to be fantastic. But he tweeted yesterday, "I've been wondering what that special place in hell looks like for those who promoted Brexit without even a sketch of a plan how to carry it out safely." So almost, you know, Tusk is almost upping it to the Champions League of Donald Trump level of tweeting. But the point being here is, beyond the kind of jokes, that Europe are not budging for now. And I think personally, from a tactical approach of negotiation, absolutely that is to be expected. We were talking about this in the live chat room yesterday. I don't think a delay at this point is anything really that unexpected. That doesn't detract from the point though that I do think that movement will happen. It just needs to happen, and will in my point of view, closer as we get to the deadline. Now what this has led to then, a couple of articles to be aware of, is this. This was Bloomberg's take, uh, UK Parliament's next opportunity to vote on Brexit, which has been expected for February 14th, could be delayed. This is according to a person condition of speaking without being known. And then this was the Telegraph article which has drawn some attention this morning, and it follows the same kind of narrative. Theresa May preparing to delay vote on deal until a month before Brexit amid warnings Article 50 extension now is all but inevitable. And something which we've been talking about on the desk, obviously, in these briefings for a while. The point being is, although Article 50 being extended You know, as this would suggest, I do agree that it's almost inevitable, and that in itself should act as a short-term positive. Until we get to that being definitive, I think that overall there's going to be an increased pricing in of potential no deal, up to the point then when this happens, and then you get quite a sharp but short-term relief rally. It's kind of how I'm looking at it. All right, moving on to the other big thing is of course the Bank of England. Um, I did send this out to you guys earlier today. This is the, the Bloomberg kind of preview, what to watch in the Bank of England rate decision this morning. So giving you a quick kind of overview, not expecting any interest rate change, um, so there's no point even worrying about that or putting it as a factor to look out for. It's not going to happen. The vote split, what could that be? Well, just given the kind of the obvious threats to the economy and the time horizon with Brexit being so close, I'd find it incredibly hard for someone to step out of the group and say, you know what, we should hike rates right now. I think that the most prudent approach, obviously, even if you were a hawk, would be to stop, assess where we are by the next meeting or that beyond. Once we know what happens with Article 50, and then you can make a more informed decision. So looking at no change in rates and a unanimous 9-nil vote. Now, the thing that makes this release a little bit unique is we obviously get the regular statement, which is their assessment in short form of economic conditions, inflation, growth, and so on, the reason why they chose to hold. And then you also get the minutes. Now, the minutes obviously will be quite interesting particular emphasis on how they use the wording around the ramifications of Brexit, what they see that having as a knock-on effect to the economy, and subsequently their, their policy view. And then the final thing is you get the quarterly inflation report. So this is when you get the kind of, uh, the, the four, or one of the four occasions on the eight meetings per year when the Bank of England will then sit down, Mark Carney and his fellow senior MPC members and they'll discuss through their economic projections for growth and inflation over a 2-year horizon, which give us as market participants an idea of their interest rate plan in the future. Now, there's a big problem with that, quite an obvious one, is that UK economic performance could go like that, or it could go like that, depending on the outcome. We'll see if we had a no deal, or we have orderly Brexit. Now, from an economic point of view, there's a couple of interesting kind of charts, I guess. This is the— I'll make this a bit bigger— this is the UK composite PMI. So this is when it's the composite, it basically is the combination then of the manufacturing and the service readings. And as you can see here, there's been a consistent slowdown in UK economic data And this really showcased in this PMI data set, which is one of the tier 1 economic data points. And you can see from basically the commencement of the final quarter of last year, UK economy has been continuing to slow down as confidence is diminishing all the time that a deal is not being struck. Okay, so that's exhibit one, and that's obviously negative. Uh, the other thing though here, and this is although there's the obvious reasons not to make any move What's quite interesting is the wage one. I'm just trying to see if they've got one here, but yeah, this is the chart that I wanted to show you. And this was British workers are enjoying a long-awaited return of real wage increases. Now what's important on this graph is if you look at 2017, this was when, if you remember, wages were basically static. But inflation, as a byproduct of the 12% or so depreciation of the pound on the night of the referendum, had a consequence of rising inflation several months later. So as time went on, you had an increasing divergence, i.e., the cost of living getting more and more expensive. And the pay gap then of basic pay growth and CPI inflation was negative almost to the tune of a percent at one point. And that's what led to then the kind of the economic kind of story slowing down. Now fast forward to where we are today, and actually we've got the most robust growth that we've had from a basic pay growth level on a year-on-year perspective going back till basically the end of 2016. So, you know, with unemployment in the UK actually at very strong levels, i.e., a lot of people employed, wages inevitably, you know, traditional economic theory would suggest go up, and that is what we have been seeing. And so as a net result, well, inflation, although that has been, as you can see here, falling back towards the target of 2%, you could argue that there's relevant underlying conditions that means if you were to remove Brexit and have an orderly one, or at least one that gets delayed for many months, years, then the Bank of England really should be sounding a little bit more hawkish. So this is the, the risks I would say associated with today. So the economy is slowing, investors have been quite aggressively pricing out a rate hike from the Bank of England. GDP, I mean, this is annual growth remaining relatively from NISA forecasts and Bloomberg surveys. You can see here 2018, they actually see as the, the trough of the, the slowdown. And actually we increase and remain fairly constant as towards the levels we've grown at since the referendum itself. Because remember, as a baseline scenario, the Bank of England, although they have scenarios priced into their models The baseline is still much like the market consensus is, is that we do muddle our way through and in the end have an orderly Brexit. And as a byproduct, well, GDP holds up. So today I would say main things I would suggest to look out for is I actually think that there could be a hawkish surprise to the Bank of England. And that's not that it's going to be hawkish, I just think the market's so overtly bearish what's happening. I just don't think it will be as dovish maybe as some might think. And the reason for that, and underlying my view, is I think Mark Carney would rather keep his options open and not commit too much to talking up the kind of policy response to potential outcomes of Brexit which he doesn't know. So by just sitting on his hands almost and taking this wait-and-see pause approach like what other central banks have, could it be misinterpreted by the market as being not quite as dovish as maybe some were expecting? And as a consequence, then the short term, we get actually a little bit of a lift in the pound. Now that's not to detract from the bigger step back from the intraday. I still think though the overall weekly bias going forward is a negative one. So Yeah, just to manage it accordingly is going to be quite key today. Certainly I would wait for the Bank of England event, and remember, with the QIR, there's a press conference that Mark Carney is going to be speaking in a live format as well after the 12:00 event. So it's kind of like an ECB two-round format of information that we're going to get. Okay, um, quick run through of something else. This is something I saw yesterday. We were talking about it Um, but just quick recap for those who follow us on, on YouTube and don't have access to trading live. This was a research report that analysts at Citigroup put out a few days ago, and they said that copper's to rally 10% over the next 3 to 6 months. I'll leave you guys to have a look at the technical chart of copper, but it does look like a good technical setup as well. But the point here I was making is that I absolutely agree with Citi. I do think that copper fundamentally, and as I said, technically it's a, it's quite a favorable chart for upside price movement. But fundamentally, there's 3 reasons there, as I've got listed. One, the Fed have become dovish, reduces the risks of an economic collapse on monetary tightening. Now, we've had quite an incredible reversal in financial markets over the course of a last 5 to 6 weeks, which is a very short period of time. And as long as the Fed remain committed to that new course, I think then you're not going to get a repeat of what you had before. Two, China's government and central bank have pledged to do whatever it takes to support the economy. Now, as long as that remains in place and the kind of size and firepower that China we know has Again, that eradicates one of the big tail risks to what's going on. And then finally, the big macro story, of course, which is the dominant driver of overall market direction at the moment, is the trade war. And actually, I think the trade war in the end is going to get resolved, or what I'm saying is, is that the worst case will not materialize. I.e., I don't think you're gonna get an all-out tariff upon a tariff and US starts targeting Europe and everyone else and China responds and a complete breakdown. We know the economic consequence of that happening is so grave that I think, of course, they will push the narrative as far as possible, but such as what Trump has done with other key issues in the end, and I think China's willingness as well to make this make something happen to resolve this going any further. I think in the end there's political will both sides to make that happen. So for those reasons, given how hard industrial metals were hit in recent months on the back of this narrative of a global slowdown, I think there's some good value there in industrial metals. And I, I agree with what Citi analysts are saying. To further supplement that, this morning JP Morgan's come out and said the same thing. Federal Reserve pause on further tightening and a chance of positive surprise from China's economy. They say, um, JP analysts, they're beefing up risk-taking positions, cutting cash levels, and favoring industrial metals. And in fact, they're coming out of gold and looking to re-enter into industrial metals to play this same situation which we've just described. Interestingly, there's been A couple of big European corporate earnings this morning, nothing really to meaningfully move the, the index futures for, uh, in that regard. But fitting this metal story, and this isn't an intraday play, I'm talking more slightly longer term than that, but ArcelorMittal, which is the world's largest steelmaker, French listed, they forecast a slight expansion of global steel demand in 2019 after a healthy market drove its earnings to its highest level in a decade last year. So what I quite like about this idea at the moment is that there's fundamental reasons from a government level, from a central bank level, and underlying on a micro level. Also, the companies here are upbeat about what the future holds for these metals that are linked to a return of, of kind of economic appetite, at least for these, these metals used for building and construction and so on. So it was quite interesting to see how all these different stories have kind of linked together, but all pointing in the same direction. Uh, the other big company, one of France's largest, of course, is Total. They did report this morning net adjusted profit up 10%, enabling it to report a full-year profit rise of 28%, buoyed by record oil and gas production during the year. So just an independent story there for one of Europe's biggest companies. Okay, quick look at the calendar and I'll hand you over to Sam. So let me just bring that over. What have we got? Well, this morning, as you can imagine, things are very quiet. Really, it's the Bank of England, so just waiting to see what the outcome of that situation is. And again, that's 12 o'clock, and then we'll get the press conference with the Bank of England at 12:30. So strongly suggest you stay out of any real pound positions until that point. And then look to take action accordingly if the opportunity arises from what we've just discussed. You do have UK Prime Minister Theresa May, obviously she's concluded her 2-day tour of Northern Ireland, she now goes to Brussels, but if the press is to believe, and I certainly think that this is the case, there's not gonna be any material outcome of her discussions in Europe today. I think it's just gonna be the status quo. There's still a reluctance for Europe to do anything because they're looking for the UK to come up with the potential alternatives, and that's just not happening at this point. So it's kind of a meeting, discussions. I would expect the same to kind of roll over. Moving into the afternoon, weekly jobless claims as per usual from the US, and that's pretty much it. Just something else to be aware of if you're— I know a couple of guys in the trading live room if you are trading Bunds this morning. Bunds have come off a little bit more recently, I guess. Support point, just keep an eye on the pivot level. But as you can see from the calendar here, you've got the Tesoro and the French Trésor coming out, and they've got a large amount of fixed income supply hitting the market this morning, which could act as a bit of a weight as markets preset ahead of the auction release. Okay, that's it. Hand you over to Sam. From me. Have a good day, I'll see you in the chat room.

Hi guys, uh, just gonna start off having a— well, actually, oil just, uh, pushing back above towards the pivot. 53.95 on the future is not a bad level of resistance to keep an eye on. Just you can see there this morning we had a couple of tests around that area, so oil just pushing back above. Dollar just come up a tiny bit from quite a strong morning already. Just having a quick look over, uh, gold, which looks quite interesting. You can see here rejecting the sort of the S1 and previous low of the day and just come up to test, uh, a potential— well, you can see that you've got the third test of that trend line there. So price perhaps getting squeezed in, and now we've had a rejection there. Probably worth getting on one from the bottom. If anything like yesterday's to go by, obviously you've got to be aware of the break either side. And took a bit of time yesterday for gold to really confirm that break below. Yes, the, the move down to S1 was nice, and you can see the top end of that trend held well before the breakdown into the back end of yesterday afternoon. And, uh, on a sort of longer term chart, I know we talked about it in the briefing yesterday and that strategy report, uh, 1308, that sort of low that we had back on the 28th of Jan, back end of January, sort of come into play. And then the next sort of area I'd be aware of is 1300 handle. I don't see that being too far away from happening before we can potentially look to move higher. Was it with the pound? Uh, Brexit comments to be aware of, but also today is, as I mentioned, Bank of England. So probably not— what time is it now? Nearly 9 o'clock. Probably not the best time to be looking for a new trade. I, I do like the look of the low of the day, which was not too far away from being the low of yesterday and Tuesday as well. So quite an interesting area should we, we get there. Finding a bit of resistance now on the S1. And euro, which like with gold yesterday, when the dollar started to strengthen into the back end of the session, you can see how that only really went as we came into sort of 6 o'clock and spent a long time around the S1 before making that decision. And really did stay in that bit of a trend. But the dollar just coming off a touch here, and the euro worth probably keeping an eye on, on what happens around here. As well as we sort of look to come and test that. If the dollar continues to weak, it might be that the opportunity for gold would be on a break of this trend line coming down there. So that, and maybe the high of the sort of the morning that we've seen, and then the low of yesterday, if that was to go, then gold might start to recover as well quite nicely. S&P, uh, did push down. I was watching this just, uh, the back end of yesterday's session is removed that moving average. And, uh, it did a couple of times look like it wanted to break through that pivot. Did get quite choppy around there in a day where the bears really could have taken over again and, and didn't. Although having a look at the last few days, you can see just how sideways price action is on that. For a push higher, again with these, these trend lines, it can be quite useful and also in the mix those previous lows of the day. This happened a couple of times in, uh, in S&P in recent times, sort of waiting for that break when the, the volume comes in. And that could be, uh, the way to sort of look at this market. Let's have a quick look over at oil again. The, the DOE numbers perhaps came to save the day. If we get the trend line on from that, that low that we had, obviously kind of the focus will be on A lot of people will be looking at the end of the week as well, but if I just get that on here, you can see we came back to retest that post-DOE, but importantly, we did close below there. So a win for the bears despite the positive move we saw following the, the energy, uh, the DOE numbers yesterday. So we're still keeping an eye on, on that trend line, especially as we come back into the, the latter part of the week. And on a more intraday, uh, base. If I just put the pivots back on, you know, looking at potential places to sell around the R1 doesn't look too bad. And you've also got a bit of resistance that we had back on the Wednesday, Tuesday as well, should we get back up there, of course. But we are looking at that calendar just to go over again. It's going to probably be a likely sort of range range-bound morning unless you get a couple of breakouts in the dollar. Gold to the upside or downside would be one that I'd be having a look at. The pound, I'd be wanting to sit on my hands until, uh, 12 o'clock and beyond. A bit of US data into the afternoon, but not massively important, uh, really. Beyond the, uh, the market throughout the day, and any questions as usual, please, uh, you know, do get them in the chat, uh, whether it be you know, medium term or longer term as well. US stocks has found a bit of support this morning before pushing higher. The Dow, NASDAQ, and S&P off their, their lows, coming to potential trend lines. So also worth keeping an eye on. And as I mentioned with the Bund, uh, it's actually right now on the pivot, so worth keeping an eye on that. Hope you all have a good trading day, and I'll catch you in the chat.