UK Interest Rates in Focus

Daily Update - 2nd November 2017

Yesterday’s Focus

• USD ADP Employment Change, ISM Manufacturing PMI, FED’s Monetary Policy, Interest Rate Decision

Yesterday’s Explained

The U.S. dollar ended the day higher against all of the major currencies despite the relatively subdued reaction to the Federal Reserve's November monetary policy announcement.  As expected the Fed unanimously decided to leave interest rates unchanged and their forward guidance unchanged.

According to the FOMC statement, U.S. policymakers see economic activity rising at a solid rate despite the recent hurricanes. This positive outlook and their belief that the storms won't alter the economy's medium-term course offset their concerns that inflation for items other than food and energy remained soft.  With spending rising at a moderate rate, investment picking up, the labor market continuing to strengthen and unemployment declining, investors saw the statement as a green light for December tightening.

Today’s Focus

• EUR Unemployment Rate, Markit Manufacturing
• BOE Interest Rate Decision, Monetary Policy, Quarterly Inflation, MPC Vote Hike, Minutes, Gov Carney Speech
• USD Jobless Claims

Today’s Market

Following a quiet day on the stats front on Wednesday, economic data out of the Eurozone is on the heavier side this morning and includes finalized October manufacturing sector PMI numbers together with employment figures out of Germany and Spain. We will expect the numbers out of Germany to be key through the session and are forecasted to be EUR positive.Good news for the EUR is the lack of noise from the Catalan government on independence, as Catalan leaders flee the country following the court’s issuance of summons for the Catalan President and other leading members of the Catalan government. Stats out of the UK are limited to October’s construction PMI, which is unlikely to have a material bearing on the Pound, barring a return to expansion, with the markets expected to be fixated on the BoE through the day.

Across the Channel, things will be heating up for the Pound ahead of this afternoon’s interest rate decision, with the markets having priced in a more than 80% probability of a rate hike. While there remains a distant possibility of the BoE holding, which would certainly sink the Pound, the continued build-up in inflationary pressure suggests that a move is not only likely, but needed. The only question that remains is whether the rate hike will be a dovish or a hawkish one. If Carney and the team are looking to ease inflationary pressures, we would expect the need for the rate hike door to be left open and while we would expect some link between future rate hikes and inflation in the minutes and Carney’s speech, the proof will likely be in the vote count.

Across the Pond, following the FED’s monetary policy decision and release of the FOMC statement, focus will now be largely on Trump’s decision on who will be the next FED Chair, with progress on tax reforms also of material influence.