Markets

Pound Unlikely to Get BOE Boost as ‘Smooth’ Brexit Doubts Build

Published

7 years ago

June 14, 2017

Pound Unlikely to Get BOE Boost as ‘Smooth’ Brexit Doubts Build

The pound is unlikely to find any support from this week’s Bank of England meeting, according to analysts and fund managers, with officials likely to refrain from signaling tighter monetary policy amid slowing wage growth and political disorder in the U.K.

Even with inflation at a four-year high, analysts remain doubtful that Governor Mark Carney will talk up prospects of higher interest rates, like he did in May, given the inconclusive result of the June 8 election and intensifying squeeze on consumers. Last month the central bank said its rate outlook was based on the assumption of a smooth Brexit.

With the possibility of a weaker government facing the European Union at the negotiating table, the BOE might find it tougher to reiterate that view, thus making it harder for the pound and gilt yields to rise, analysts said.

The central bank will leave its benchmark rate unchanged at 0.25 percent, according to all 48 economists in a Bloomberg survey
In the May meeting, of the eight Monetary Policy Committee members only Kristin Forbes dissented, voting for an immediate increase
Markets see a near 45% chance of a rate increase by December 2018, MPC-dated Sonia show
- They’re also pricing in around a 24% chance of a 25-basis-point rate increase by mid-2018, which is in contrast to the near-50 percent chance seen as recently as in March
GBP/USD at $1.2732, down almost 2 percent since the election, and yield on 10-year gilts at 1.02%, down 2 bps from June 8

Below is a compilation of investors’ and analysts’ expectations for the meeting, and the outlook for gilts and the pound:

Mizuho Bank (Sireen Harajli, Neil Jones)

The uncertainty “cast by a hung parliament will drive the Bank of England to shift toward a more dovish stance,” according to FX analyst Harajli
Expects BOE policy will remain steady this year with the possibility of easing in 2018
Speculators, who had been trimming GBP short positions over past weeks might reverse that position due to the election results “leaving GBP vulnerable to more downside risk as GBP shorts are re-built,” Harajli says, predicting sterling will reach $1.22 by year-end
Wednesday’s wage numbers mean the MPC could shift back to a “unanimous dovish 8-0 stance” this week or in the next meeting, according to Jones

Allianz Global Investors (Mike Riddell, money manager)

The BOE assumption “of a smooth transition is now looking even more unlikely” after the election
Over the medium to long term Riddell says he is “mildly constructive” on gilts as the risks to the U.K. economic outlook “are to the downside”
Riddell was bullish gilts going into the BOE meeting in May and says the central bank is likely to “be more dovish than the market seems to expect”
The difference between now and back in May is that the “market is not pricing in a series of rate hikes and gilt yields are a lot lower”
- Riddell still has “a slightly bullish position but it is not a high conviction view as markets have already moved a little” in gilts

JPMorgan Asset Management (Iain Stealey, senior fixed-income portfolio manager)

Expects the BOE to look through what it calls “transitory inflation” which it may see as “almost a tax on the consumer so they are not going to want to do anything”
Stealey says he prefers to stick to their neutral gilts stance as they “would prefer to let the dust to settle”
“It’s very hard to buy gilts at 1% on the 10-year, likewise if the BOE aren’t moving rates higher, it is very difficult to build a case to be short gilts when you have all this uncertainty going on”
“Bottom line is no one really knows what the election from last week created and the BOE has no more insight than we have”

Commerzbank (Thu Lan Nguyen, FX strategist)

The BOE “will broadly stick to their latest assessment and at the most point out that political risks have increased”
There may be some “that hope that the BOE signals a higher likelihood of imminent rate hikes following the latest inflation figures. However, I think that this is counterweighted by the heightened political risk”
So there could be some that may be “disappointed by the fact that the BOE remains cautious, which could put some pressure on pound”
With the election outcome and impending EU negotiations “the probability of a negative scenario for the British economy has increased, which will force BOE to keep a more expansionary monetary policy for some time,” she says
Predicts sterling will fall to $1.21 by the end of this year but says it could revise that number to the upside if “the new government seeks a softer Brexit”

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Samed Olukoya

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Prices Dip on Sluggish Demand Signs and Fed’s Interest Rate Outlook

Published

1 day ago

May 13, 2024

Samed Olukoya

Oil prices on Monday dipped as the U.S. Federal Reserve officials’ comments showed a cautious approach to interest rate adjustments.

The dip in prices reflects concerns over the outlook for global economic growth and its implications for energy consumption in the world’s largest economy.

Brent crude oil, against which Nigerian oil is priced, slipped by 7 cents or 0.1% to $82.72 per barrel while U.S. West Texas Intermediate crude oil stood at $78.21 per barrel, a 5 cents decline.

Auckland-based independent analyst Tina Teng highlighted that the oil market’s focus has shifted from geopolitical tensions in the Middle East to the broader world economic outlook.

Concerns arose as China’s producer price index (PPI) contracted in April, signaling continued sluggishness in business demand.

Similarly, recent U.S. economic data suggested a slowdown, further dampening market sentiment.

The discussions among Federal Reserve officials regarding the adequacy of current interest rates to stimulate inflation back to the desired 2% level added to market jitters.

While earlier in the week, concerns over supply disruptions stemming from the Israel-Gaza conflict had provided some support to oil prices, the attention has now turned to macroeconomic indicators.

Analysts anticipate that the U.S. central bank will maintain its policy rate at the current level for an extended period, bolstering the dollar.

A stronger dollar typically makes dollar-denominated oil more expensive for investors holding other currencies, thus contributing to downward pressure on oil prices.

Furthermore, signs of weak demand added to the bearish sentiment in the oil market. ANZ analysts noted that U.S. gasoline and distillate inventories increased in the week preceding the start of the U.S. driving season, indicating subdued demand for fuel.

Refiners globally are grappling with declining profits for diesel, driven by increased supplies and lackluster economic activity.

Despite the prevailing challenges, expectations persist that the Organization of the Petroleum Exporting Countries (OPEC) and their allies, collectively known as OPEC+, may extend supply cuts into the second half of the year.

Iraq, the second-largest OPEC producer, expressed commitment to voluntary oil production cuts and emphasized cooperation with member countries to stabilize global oil markets.

However, Iraq’s suggestion that it had fulfilled its voluntary reductions and reluctance to agree to additional cuts proposed by OPEC+ members stirred speculation and uncertainty in the market.

ING analysts pointed out that Iraq’s ability to implement further cuts might be limited, given its previous shortfall in adhering to voluntary reductions.

Meanwhile, in the United States, the oil rig count declined to its lowest level since November, signaling a potential slowdown in domestic oil production.

As oil markets continue to grapple with a complex web of factors influencing supply and demand dynamics, investors and industry stakeholders remain vigilant, closely monitoring developments and adjusting their strategies accordingly in an ever-evolving landscape.

Crude Oil

Brent Crude Hovers Above $84 as Demand Rises in U.S. and China

Published

4 days ago

May 10, 2024

Samed Olukoya

Brent crude oil continued its upward trajectory above $84 a barrel as demand in the United States and China, the two largest consumers of crude globally increased.

This surge in demand coupled with geopolitical tensions in the Middle East has bolstered oil markets, maintaining Brent crude’s resilience above $84 a barrel.

The latest data revealed a surge in demand, particularly in the U.S. where falling crude inventories coincided with higher refinery runs.

This trend indicates growing consumption patterns and a positive outlook for oil demand in the world’s largest economy.

In China, oil imports for April exceeded last year’s figures, driven by signs of improving trade activity, as exports and imports returned to growth after a previous contraction.

ANZ Research analysts highlighted the ongoing strength in demand from China, suggesting that this could keep commodity markets well supported in the near term.

The positive momentum in demand from these key economies has provided a significant boost to oil prices in recent trading sessions.

However, amidst these bullish indicators, geopolitical tensions in the Middle East have added further support to oil markets. Reports of a Ukrainian drone attack setting fire to an oil refinery in Russia’s Kaluga region have heightened concerns about supply disruptions and escalated tensions in the region.

Also, ongoing conflict in the Gaza Strip has fueled apprehensions of broader unrest, particularly given Iran’s support for Palestinian group Hamas.

Citi analysts emphasized the geopolitical risks facing the oil market, pointing to Israel’s actions in Rafah and growing tensions along its northern border. They cautioned that such risks could persist throughout the second quarter of 2024.

Despite the current bullish sentiment, analysts anticipate a moderation in oil prices as global demand growth appears to be moderating with Brent crude expected to average $86 a barrel in the second quarter and $74 in the third quarter.

The combination of robust demand from key economies like the U.S. and China, coupled with geopolitical tensions in the Middle East, continues to influence oil markets with Brent crude hovering above $84 a barrel.

As investors closely monitor developments in both demand dynamics and geopolitical events, the outlook for oil prices remains subject to ongoing market volatility and uncertainty.

Crude Oil

Brent Plunges Below $83 Amidst Rising US Stockpiles and Middle East Uncertainty

Published

6 days ago

May 8, 2024

Samed Olukoya

The global oil declined today as Brent crude prices plummeted below $83 per barrel, its lowest level since mid-March.

This steep decline comes amidst a confluence of factors, including a worrisome surge in US oil inventories and escalating geopolitical tensions in the Middle East.

On the commodity exchanges, Brent crude, the international benchmark for oil prices, experienced a sharp decline, dipping below the psychologically crucial threshold of $83 per barrel.

West Texas Intermediate (WTI) crude oil, the US benchmark, also saw a notable decrease to $77 per barrel.

The downward spiral in oil prices has been attributed to a plethora of factors rattling the market’s stability.

One of the primary drivers behind the recent slump in oil prices is the mounting stockpiles of crude oil in the United States.

According to industry estimates, crude inventories at Cushing, Oklahoma, the delivery point for WTI futures contracts, surged by over 1 million barrels last week.

Also, reports indicate a significant buildup in nationwide holdings of gasoline and distillates, further exacerbating concerns about oversupply in the market.

Meanwhile, geopolitical tensions in the Middle East continue to add a layer of uncertainty to the oil market dynamics.

The Israeli military’s incursion into the Gazan city of Rafah has intensified concerns about the potential escalation of conflicts in the region.

Despite efforts to broker a truce between Israel and Hamas, designated as a terrorist organization by both the US and the European Union, a lasting peace agreement remains elusive, fostering an environment of instability that reverberates across global energy markets.

Analysts and investors alike are closely monitoring these developments, with many expressing apprehension about the implications for oil prices in the near term.

The recent downturn in oil prices reflects a broader trend of market pessimism, with indicators such as timespreads and processing margins signaling a weakening outlook for the commodity.

The narrowing of Brent and WTI’s prompt spreads to multi-month lows suggests that market conditions are becoming increasingly less favorable for oil producers.

Furthermore, the strengthening of the US dollar is compounding the challenges facing the oil market, as a stronger dollar renders commodities more expensive for investors using other currencies.

The dollar’s upward trajectory, coupled with oil’s breach below its 100-day moving average, has intensified selling pressure on crude futures, exacerbating the latest bout of price weakness.

In the face of these headwinds, some market observers remain cautiously optimistic, citing ongoing supply-side risks as a potential source of support for oil prices.

Factors such as the upcoming June meeting of the Organization of the Petroleum Exporting Countries (OPEC+) and the prospect of renewed curbs on Iranian and Venezuelan oil production could potentially mitigate downward pressure on prices in the coming months.

However, uncertainties surrounding the trajectory of global oil demand, geopolitical developments, and the efficacy of OPEC+ supply policies continue to cast a shadow of uncertainty over the oil market outlook.

As traders await official data on crude inventories and monitor geopolitical developments in the Middle East, the coming days are likely to be marked by heightened volatility and uncertainty in the oil markets.