• Bank of England: First “Super Thursday” of the year Today, the BoE simultaneously releases its monetary policy decision, the meeting minutes and its quarterly Inflation Report. No change in policy is expected at the meeting, while consensus is that the vote will once again be split 8-1 with the lone dissenter, Ian McCafferty to maintain his call for a rate hike. Therefore, the focus will be on the tone of the meeting minutes, the updated economic projections of the Inflation Report, and on any comments from Gov. Carney’s press conference. A lot has changed since the BoE published its November inflation Report and the degree to which the new projections will be changed are likely to determine sterling’s reaction. We expect the Bank to revise down its near-term GDP growth and inflation forecasts. Officials could state that inflation will edge up slower than previously expected due to the continuous slump in oil prices. On the other hand, given that the labour market has continued tightening faster than expected, we see downside revisions in the unemployment rate forecasts. However, following Gov. Carney’s remarks that now is not the time to raise rates, we believe that an improving labor market would not be enough to persuade the Bank to press the hike button any time soon. The slowdown in China, the continuous collapse in oil prices as well as the moderate domestic wages and GDP growth are enough reasons for the Bank to be patient. But we still maintain the view that perhaps the biggest obstacle for the BoE is the uncertainty surrounding the forthcoming “Brexit” referendum. Therefore, we will be also looking for any hints or comments on how this pre-referendum environment has been affecting the British economy and as a consequence, the Bank’s policy-setting framework. Overall, evidence of a dovish rhetoric could diminish market expectations for any rate hikes in 2016 and may put the pound under renewed selling pressure.
• Fed’s Dudley pushes hike expectations further back Yesterday, New York Fed President William Dudley stated that financial conditions have tightened considerably since the FOMC raised interest rates. If this situation continues until March, policy makers would have to take that into consideration when deciding on interest rates. He also added that any further strengthening of the dollar could have serious consequences for the health of the US economy. Echoing Vice-Chair Fischer’s recent comments that the slowing global economy could impact growth and inflation in the US, Dudley’s remarks pushed further back market expectations for the second hike to come in March. Investors currently assign a 10% probability for a hike at the next Fed meeting. His comments also served as a catalyst for a major sell-off in USD, which weakened significantly across the board.
• Besides BoE: Today, we get data only from the US. The preliminary Unit Labour Costs Index for Q4 is forecast to have accelerated from the previous quarter. Usually this indicator is not a major market mover. However given the Fed’s emphasis on the labor market and just one day ahead of the US employment report, it might attract some attention. Initial jobless claims for the week that ended January 28th are expected to have increased, which would increase the 4-week moving average somewhat as well. Factory orders are forecast to have fallen in December at a faster rate than the previous month. This would be the 5th consecutive month of a fall in the figure and given the recent softness in industrial indicators and surveys, this could prove USD-negative.
• We have three speakers scheduled on Thursday: BoE Governor Mark Carney, ECB President Mario Draghi and ECB Executive Board member Yves Mersch.