Will BoE Be One and Done?

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Market Drivers November 2, 2017
Dollar wobbles on US Tax reform concerns
Market waits for BoE
Nikkei 0.53% Dax 0.09%
Oil $54/bbl
Gold $1276/oz.

Europe and Asia:
EUR GE Unemployment -11K vs. -10K
GBP UK PMI Contruction 50.8 vs. 48.1

North America:
GBP BoE Rates 12:00
GBP Boe Presser 12:30
USD Weekly Jobless 8:30
USD Powell speaks 8:30

The dollar took a tumble in early Asia dealing today on concerns over the rumored US tax reform proposal that may make the cut in corporate rates only temporary rather than permanent.

After news leaked that the proposed tax reform package by GOP would force US rates back up to 35% from 20% after 10 years due to the budget rules in the Senate, the dollar lost much of its luster with USDJPY dropping to 113.73 before finding some support.

The buck recovered the 114.00 figure in morning European dealing and could try to make another run at the 114,50 level after more tax reform details are released later today. Also today in North America President Trump is expected to nominate Jerome Powell to the Fed Chair. The market sees him as a continuation of Janet Yellen’s mildly dovish bias, but Trump also nominates John Taylor the overall makeup of the Fed should tilt hawkish and that may prove supportive for the buck as well.

The main event of the day, however, will be the BoE rate decision due at 12;00 GMT. There is almost universal belief that the bank will hike 25bp at today’s meeting to dampen some of the inflationary pressures in the economy. UK economy has been surprisingly resilient with this week’s Manufacturing and Construction PMI’s both beating forecasts. That should provide further support for a rate hike today.

The key question, however, will be forward guidance. Will the BoE remain cautious in its policy outlook, stressing that inflationary pressures are only temporary? If so, cable will quickly sell off as marker hopes will be dashed. On the other hand, if BoE suggests that this is just the start of a tightening cycle the pair could see a sharp move higher and could even challenge the 1.3400 figure by end of day as carry trade flows will pour into the unit. It’s difficult to imagine that BoE would adopt a highly hawkish tone against the uncertainty of Brexit negotiations so the likely scenario is that Mr. Carney will be supremely careful with his words, but the chance of an upside pop today remains a serious possibility.

Boris Schlossberg
Managing Director

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