LCG Research Team: The sell-off in oil is weighing on the FTSE stocks. The barrel of WTI broke below $44.00 and the market remains on the sell side of the game, given the looming uncertainties vis-à-vis the informal OPEC meeting.
Royal Dutch Shell (-0.74%) and BP (-0.69%) are leading losses at the London open, while other sectors tread water before the Bank of England’s (BoE) policy verdict.
The BoE is expected to maintain the status quo at today’s MPC meeting. We do not anticipate any additional action given that the latest economic data suggests that the UK’s economy is holding ground following the primary Brexit hit.
The FTSE 100 recovered up to 90% of the post-Brexit losses by mid-August, as the pound paired a third of the value it lost against the US dollar over the same period.
Two months is a short period of time to evaluate the medium and long-term economic implications of such a sizeable structural change. Brexit’s impacts on the real economy will be gradual as the country will progressively interrupt its existing relationship with the European Union, and build new partnerships almost from scratch depending on how much the political and legal environment will evolve.
In this long journey to the post-Brexit era, the BoE will need to do a major part of the heavy lifting to make sure that the monetary conditions are accommodative for a healthy transition. Yet given that the BoE, as has a majority of the leading central banks, have already used heavy munitions to fight back an eight-year long recession, the timing of Brexit has been inopportune. As of today, the BoE’s manoeuvre margin is limited.
The bank rate is already at the bottom of the range, 0.25%, and the Bank of England is already targeting to buy the massive amount of £435 billion of sovereign bonds. Besides, it will start purchasing corporate bonds on September 27th aiming to buy up to £10 billion worth of bonds over the next 18 months. In our view, the action is already taken. It is now time for the BoE to sit back and observe.
Hopefully, the astounding recovery in the business sentiment will buy some time for the BoE before it feels the fresh need to expand its stimulus programme to avoid a potential recession in the coming quarters.
At today’s meeting, the most important insight will be the evolution in the BoE’s economic assessment and projections.
Although the key macro-metrics, inflation and unemployment, remained resilient following the 25 basis points cut six weeks ago, the UK’s economy displayed a solid posture.
Therefore, any optimism in the BoE’s rhetoric should further ease the probability of additional stimulus before the end of the year and give further support to the actual recovery in the pound market.
Unless any unexpected dovish rhetoric, or action, should take place, the mid-term recovery should allow the GBPUSD to advance towards 1.3642 (major 38.2% retracement on post-Brexit sell-off). Intra-day supports are seen at 1.3200 (minor 23.6% retrace on Sep 6th –- Sep 14th decline), 1.3138 (Sep 14th double bottom) and 1.3056 (Aug 29th & Aug 31th double bottom).