Equity markets have hit a roadblock today as investors struggle to push markets higher for the third consecutive day. Looking at yesterday’s price action, it became increasingly clear that there is some hesitancy among traders to commit to riskier bets. One of the reasons for this is that investors and traders usually do not like to trade big ahead of the main event that is taking place tomorrow—the US NFP data. Yesterday, we had a small flavour of this number. The US ADP and the ISM Services PMI confirmed that economic conditions are improving. Both numbers triggered a small rally in the dollar index, and we also saw a sell-off in the gold prices as well.
Gold prices are trading sharply lower today as well. That is because investors know that there may not be any need for a loose monetary policy for an extended period of time. Countries are working fast in getting the public over the vaccination line. For instance, the UK, which has the worst track record in dealing with the Covid crisis in Europe, is leading the vaccination game. Nearly 15 million people are likely to get the vaccination by 15th February, which was the government’s initial target. The situation is very similar in the US, where vaccination is the top priority.
Overall, gold prices are very much stuck in a big consolidation zone, from 1802 to 1876. Tomorrow, we are highly likely to break this range as the US NFP data may change the narrative on gold among traders.
Bank of England
Today, the most important event is the Bank of England’s meeting. The bank is going to announce its monetary policy, and this is going to bring higher volatility in the forex market. The BOE has been toying with the idea of negative interest rates. However, today is not the day that the bank is going to execute on this despite the fact that the UK has left the EU, and the country is in battle with a new variant of coronavirus. The Governor of the Bank of England, Andrew Bailey, said last month that pushing interest rates any further lower, meaning in negative territory, could create a lot of issues that the UK isn’t ready for.
Today, the focus will be on forward guidance, and the bank will utilise this tool to address many challenges as there is no way of sugar-coating that the economic numbers, despite some improvement, are still very much in deep recession territory. The Composite PMI number for the last reading was 41.2, which is far away from the level of 50, a level that differentiates between expansion and contraction.
Sterling’s price action is giving one clear signal, and that is traders have not priced in any surprise meaning there are no expectations of the negative interest rate. There will be a lot of jawboning, which could potentially bring higher volatility.
It is important to keep in mind that a surprise move’s biggest effect occurs when traders are least expecting it. For instance, a rate cut by the Bank of England today, which one can never rule out because economic growth is really weak and likely to remain that way for some time, is going to trigger a massive sell-off in the Sterling. On the other hand, utilising forward guidance along with jawboning is likely to trigger a rally in the Sterling.