Daily Insight
Group Economics Macro & Financial Markets Research
06 November 2015
Sterling slides on dovish BoE Georgette Boele
BoE remains on hold with downside risks to the inflation outlook…
Co-ordinator FX & Precious Metals
…pushing sterling lower
Strategy
We expect the first rate hike in August next year
US dollar remains strong ahead of the US employment report
Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
Bank of England remains on hold with downside risks to inflation outlook Overnight, the Bank of England (BoE) left monetary policy unchanged as widely expected. It voted by 8-1 to maintain Base Rate at 0.5%. The dissenter was Ian McCafferty who preferred to increase the Bank Rate by 25bp. The BoE expects that CPI will remain below 1% until the second half of next year. Beyond that, the dampening influence of sterling’s past appreciation on inflation is expected to be persistent. In this context, the MPC judged it appropriate to return inflation to the target in around two years. The MPC also sees downside risks to CPI over the next 2 years. In addition, it trimmed its growth forecast. The more dovish than expected MPC led to a downward adjustment of rate hike expectations for next year. Financial markets are currently pricing in a 35% probability of a 25bp rate hike in the last four months of 2016. Expectations for a total of 50bp in 2016 have been reduced.
Inflation is subdued % yoy, red line is the BoE target
6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 04
05
06
07
All items
08
09
10
11
12
13
14
15
Excluding food and energy
Source: Thomson Reuters Datastream
Insights.abnamro.nl/en
2
Daily Insight – Sterling slides on dovish BoE - 06 November 2015
UK economy is growing at decent pace but inflation is subdued The UK had the strongest economic growth of G7 in 2014. Since then economic growth has cooled but is still decent. Manufacturing and construction are the weak spots, while the UK consumer has remained in good shape. The UK unemployment rate is low and continues to fall and wages have started to move higher. We expect the BoE to be cautious in raising interest rates because inflation is subdued. We have pencilled in our first 25bp rate hike in August 2016. As we expect the BoE to start hiking interest rates after the Fed, we foresee a weaker GBP/USD in 2016 up to the moment financial market start to price in a rate hike for the BoE. However, we expect sterling to outperform the euro next year because of the monetary policy divergence between the UK and the eurozone. US dollar remains strong ahead of US employment report The US dollar (USD) strengthened against most major currencies and precious metals because of expectations that the Fed could hike interest rates in December. This was because US economic data surprised on the upside and Fed members made hawkish comments. Financial markets have priced in around 60% probability of a Fed rate hike in December. Our base case is a hike will be delayed to 2016, but chances of an earlier move have risen. Our year-end forecasts for 2015 and 2016 for EUR/USD are 1.10 and 1.00, respectively, reflecting the start of the hiking cycle next year. If US employment report surprises on the upside today, the upward momentum in the US dollar will become stronger.
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Daily Insight – Sterling slides on dovish BoE - 06 November 2015
Day
Date
Time
Country
Sunday Sunday
01/11/2015 01/11/2015
02:00:00 02:00:00
CN CN
Monday Monday Monday Monday Monday Monday Monday
02/11/2015 02/11/2015 02/11/2015 02/11/2015 02/11/2015 02/11/2015 02/11/2015
02:45:00 09:00:00 09:30:00 10:30:00 15:45:00 15:45:00 16:00:00
Tuesday Tuesday
03/11/2015 03/11/2015
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
PMI manufacturing - index (official) PMI non-manufacturing (official)
Oct Oct
49.8 53.1
50.0
CN CH NL GB US EC US
PMI manufacturing - index (Caixin) Total Sight Deposits bn PMI manufacturing - index PMI manufacturing - index Markit - Flash PMI ECB announces weekly QE details ISM manufacturing - index
Oct
47.6
Oct Oct Oct F
48.3 467.4b 53.7 55.5 54.1
Oct
50.1
49.9
50.0
04:30:00 16:00:00
AU US
RBA Cash Rate Target Factory orders
2.0 -1.0
2.0 -0.9
1.75
Sep
04/11/2015 04/11/2015 04/11/2015 04/11/2015 04/11/2015 04/11/2015 04/11/2015 04/11/2015 04/11/2015
02:45:00 10:00:00 10:00:00 10:30:00 14:15:00 14:30:00 16:00:00 16:00:00
CN EC EC GB US US US US PL
PMI services - index (Caixin) Oct PMI services - index Oct F Composite PMI output Oct F PMI services - index Oct ADP nat. employment report - thousands Oct Trade balance - USD bn Sep ISM non-manufacturing, index Oct Fed's Yellen Testified on Bank Regulation Before House Panel Reference rate - % Nov 4
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
05/11/2015 05/11/2015 05/11/2015 05/11/2015 05/11/2015 05/11/2015 05/11/2015 05/11/2015
06:30:00 08:00:00 10:00:00 11:00:00 13:00:00 13:00:00 13:00:00 14:30:00
NL DE NO EC GB GB CZ US
CPI - % yoy Manufacturing orders - % mom Policy rate - % Retail sales - % mom Policy rate - % BoE size of asset purchase programme - GBP bn Repo rate - % Output per hour nonfarm business sector - % qoq
Friday Friday Friday Friday Friday Friday Friday
06/11/2015 06/11/2015 06/11/2015 06/11/2015 06/11/2015 06/11/2015 06/11/2015
08:00:00 09:00:00 10:30:00 14:30:00 14:30:00 14:30:00 21:00:00
DE CH GB US US US US
Industrial production - % mom Foreign currency reserves - CHF mln Trade balance - GDP mln Change in employment private employment - thousands Change in employment total - thousands Unemployment - % Fed Reserve consumer credit - USD bn
ABN AMRO
52.7
52.0 54.1 53.9 54.90 182.00 -40.81 59.1
174.90 -45.72 56.4
160
1.5
1.5
1.5
1.5
0.8 1.0 0.5
0.5
0.5
0.1 0.1
0.1
0.4
0.2
167 178 5.1 17.8
160 170 5.1
Oct Sep Nov 5 Sep Nov 5 Nov Nov 5 3Q P
0.7 -1.7 0.75 -0.1 0.5 375.0 0.1 1.6
Sep Oct Sep Oct Oct Oct Sep
-1.2 541540 -3268 118 142 5.1 16.0
54.2 54.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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