MARKET BRIEFING – LONDON OPEN 20.01.2016
There was an understanding that the Bank of England would either raise interest rates at the same time or the very least would follow in step with Washington policymakers at the Federal Reserve.
However in a speech given yesterday, the Bank of England Governor painted a depressing picture of the United Kingdom and global economy.
The US and the UK economies are very similar however Mark Carney has now thrown into question from where the growth and inflation that the FOMC are seeing will come from.
Mark Carney has in effect implied that Janet Yellen and her colleagues have made a policy error in increasing interest rates in December.
Furthermore, far from moving in step with the dot plot that proposes four US interest rates in 2016, the Bank of England has now totally discounted the possibility of a UK interest rate rise during the course of this year.
The FOMC in December moved to nominalize the interest rate environment just in case inflation and wage growth got out of hand.
Yesterday’s speech by the Bank of England Governor has now created a two-way bet on the outlook of the global economy.
Was Yellen prudent in her policy to hike interest rates or is Carney’s cautious wait and see approach more in tune with the realities of this much interconnected global economy.
The fallout from yesterday’s speech sent the British Pound tumbling to lows not seen since 2009 and there are no signs yet that the bottom has been reached. On a trade-weighted basis, the depreciation in the Pound over past 6 months stands at 7%.
2016 thus far has been a year of market volatility. The New Year always gives us the opportunity to reassess our lives, our plans and our situations. Back on January 4, the market had priced in a UK rate increase for November 2016. However, yesterday’s not so pleasant reassessment of the world economy has seen the markets push back the first rate increase until the middle of 2017.
In the space of just two weeks, what was thought to be the accepted course of interest rate policy over the next twelve months has been completely changed.
However, will the economic realities in 2017 allow the Bank of England to move ahead and increase rates? What if we do not see an improvement in CPI and wage data.
Mr Carney may be hoping that the weak pound will boost inflation and stimulate exports but so far, this has not been the case. On the contrary, inflation still is under considerable downward pressure and fears of deflation persist.
The problem is that the fight to get to the bottom in a currency war just reallocates deflationary pressure to the country that has the strongest currency.
If devaluation is the only tool left available to policy makers and with question marks over quantitative easing which has plainly has not worked as expected, what is next for world’s central bankers?
What is required is sustainable global growth and this will mean that some tough choices have to be made.
Is it a case that we reassess what is meant to be normal growth and lower our expectations or do the world leaders take the bold move to address the obvious problems of a global economy that suffer from overcapacity and an addiction to debt?
Harking back to the spring and summer months of last year, one politician was thrown into the global spotlight. He is, of course, Yanis Varoufakis the former Greek Finance Minister.
Maybe just maybe, this rebellious yet likeable chap got it right. We have had QE and we are now entering a currency war. However in this interconnected world, we need courageous and interconnected reform and policies that cure the ills and not just massage the symptoms.
EURUSD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1.1009
Target 2: 1.0857
Projected range in ATR’s: 0.0107
Daily control level: 1.0850
GBPUSD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 1.4255
Target 2: 1.4056
Projected range in ATR’s: 0.0122
Daily control level: 1.4350
USDJPY
The intraday technical outlook
Trend 1 hour: Down
Target 1: 118.24
Target 2: 116.60
Projected range in ATR’s: 1.11
Daily control level: 118.15
USDCHF
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1.0098
Target 2: 0.9930
Projected range in ATR’s: 0.0103
Daily control level: 0.9955
USDCAD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1.4686
Target 2: 1.4517
Projected range in ATR’s: 0.0136
Daily control level: 1.4420
AUDUSD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 0.6947
Target 2: 0.6820
Projected range in ATR’s: 0.0133
Daily control level: 0.6835
GOLD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 1102.00
Target 2: 1079.00
Projected range in ATR’s: 15.20
Daily control level: 1096.00
OIL
The intraday technical outlook
Trend 1 hour: Down
Target 1: 29.20
Target 2: 26.74
Projected range in ATR’s: 1.83
Daily control level: 30.30
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