Morning Brief – Who are you?

Who are you?

0.7% in one day is a pretty decent rally for the Pound. Sterling currently sits at 2 week highs against the US Dollar and yesterday GBP reached 2020 highs against the Euro. But what brought us here might surprise you: Confederation of British Industry survey data! This piece of soft data is normally not considered a market moving piece of information. However, yesterday’s fragile market conditions and Sterling traders’ agitation ahead of next week’s Bank of England decision and formal exit from the Union allowed it to become salient information.

Headline data at the beginning of the year and rhetoric from the Bank pointed to the need for a cut in rates. Subsequently, soft data releases have shown evidence of a pick up in activity and confidence following December’s general election – a period not yet observed by more concrete headline economic data. The CBI data release was startling. It showed that overall business optimism had strengthened sharply to record a figure of 23 in the 3 months to January versus -44 the previous quarter.

A reading of 23 is the healthiest observation of business confidence that the CBI has recorded since April 2014 and analysis reveals that it is the sharpest quarterly gain for over 60 years. The composition of the data showed that optimism was broad based and shared by businesses affected by the exportation capacity of the UK. The CBI data is (at least) the 4th such indication of an observable economic boost granted by the 2019 general election and with the interest rate decision exactly 1 week away for the Bank of England, the data was enough to cast doubt over what was previously priced as a confident cut in rates. Money markets immediately moved to slash the discount priced into Gilt Futures to leave only a 50% probability priced in of a Jan 30th cut.

Today it is the turn of the European Central Bank to offer markets its latest interest rate decision. All three barometers of the price of Eurozone money (their interest rates) are expected to remain the same with no new commitments to outright monetary transactions Quantitative Easing. What President Lagarde is expected to do is offer more insight into the Bank’s Strategy Review. The Review could look into everything including the inflation target and monetary policy instruments. As with any systemic economic shakeup there is the potential for volatility. With the Euro at 2020 lows and political headlines in Italy dragging the single currency lower yesterday, Lagarde’s Review could even cause markets to re-view 2019 EURUSD lows.

Discussion and Analysis by Charles Porter

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