Markets
The Bank of England took center stage today. Policy parameters remained unchanged (bank rate at 0.1%, bond buying envelope amounts to £895bn in total). Markets were keen to see whether or not the UK central bank would close the debate about negative rates once and for all. The BoE told banks to start preparing for negative rates but stressed numerous times that it did not want to signal they are coming anytime soon. The central bank only wants the financial sector to be ready for them should they ever be needed, adding that implementing negative rates within six months from now would carry operational risks. With the UK in the meantime steaming ahead with the vaccination campaign, markets conclude negative rates are off the table, especially with the statement’s end remark that it instructed staff members to work on guidance about the appropriate strategy for tightening monetary policy. Similarly, the central bank noted that this should not be seen as a signal about policy going forward but the shift in tone didn’t go unnoticed. In any case, the bank said, there won’t be any tightening until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. Regarding the latter, the new growth and inflation projections reveal growth in 2020 to be less negative (-10% vs. -11%) compared to the November policy report. The economy is expected to rebound less impressive in 2021 (5% vs. 7.25%) because of the containment rules weighing down on activity in 2020 Q1 but to jump 7.25% (vs. 6.25%) in 2022 before moderating in 2023 (1.25%, unchanged). GDP is seen reaching its 2019 Q4 level by 2022 Q1. Inflation will probably be near the 2% inflation target across the policy horizon, adding further to market’s case that more easing won’t be needed. Investors have been paring back bets on negative rates over the past few days, resulting in sterling resilience. This process continued today. UK yields surged with changes varying from 5.5 bps (2-yr) to 7 bps (30-yr). The UK 2-yr yield (currently -0.03%) briefly touched 0%. Sterling skyrocketed, pushing EUR/GBP (0.877) south of the 0.88 barrier. The next technical reference lies at the 61.8% Fibonacci retracement from the January 2020 low to March high (0.874) followed by 0.867 (April 2020 correction low).
The dollar traded again strong today, gaining against most peers. EUR/USD fell below key support at 1.2011 in early European dealings to trade just shy of 1.20 for the remainder of the day. The trade-weighted DXY takes out the 91.32 resistance at the time of writing while USD/JPY ventures further north of 105(.33). US jobless claims came in better than expected. New jobless claims fell more than expected from a downwardly revised 812k to 779k. Continuing claims dropped from 4785k to 4592k. Nevertheless, follow-through gains for the dollar after these tentative technical breaks remain rather limited. Are markets waiting for the proverbial “go” by tomorrow’s payrolls? Moves on markets other than FX were muted. European stocks currently gain about 0.4% but trade very choppy. Wall Street opens in the light green. Core bond yields reversed a downward bias to trade slightly higher with both US and German yields rising a little more than 1 bp at the very long end. Peripheral spreads tighten to core, with Italy (-3 bps) extending its recent outperformance after former ECB chief Draghi was appointed to lead a new government.
News Headlines
The Czech National Bank today kept its policy rate unchanged at 0.25%, as expected. Governor Rusnok is expected to give additional guidance on the Bank’s intended rate path further out this year at a press conference later today. At the previous forecast in November the bank indicated that up to three 25 bp rate hikes could be possible this year. At the same time, the bank doesn’t want to undermine the economic recovery. EUR/CZK is taking a holding pattern near 25.90 as investors await the press conference. The krone recently strengthened beyond the EUR/CZK 26 support on better growth data and the prospect that the CNB will be a frontrunner in policy normalization.
