Financial Market Research and Analysis

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Carney hinted at possibility of rate cut
The global equity prices continue zigzagging on a muddy route. The oil market remains in bears’ hand above $30, copper struggles to secure gains above $2/lb.

As gold strengthened past $1120, an increasing number of investors consider placing their cash in yellow metal. Demand in SPDR Gold shares (+7.20%), world’s leading gold trust, increased steadily since the beginning of the year. Softening view on rate expectations across the globe could help restoring confidence as the opportunity cost remains very much subdued. Gold recovered half its losses on October-December sell-off and is looking to challenge the 200-day moving average ($1132) in the extension of a strengthening positive momentum.

In London, Sage Group (+5.20%) lead gains amid the announcement of 6.6% growth in Q1 organic revenues. The company aims for a minimum of 6% growth in organic revenues in FY16 with operational margin higher by at least 27%.

Fresnillo (1.51%) appears among top gainers while Glencore failed to maintain early gains. BHP (-2.15%), Anglo American (-1.23%) and Rio Tinto (-1.21%) are lower on suspicion that the recovery in the commodity market may not last as Chinese slowdown story remains on the headlines with the announcement of 4.7% slump in industrial profits on year to December.

Carney hinted at a potential rate cut.

The latest news is not encouraging for the pound. BoE Governor Carney said that Brexit fears could pose a current account deficit risk and the time is still not right for a rate hike. This time however, he also said that the BoE ‘could go below 0.5% if necessary.’

We observed the probabilities for a BoE rate hike fading since the beginning of the year. Nowadays, we see the UK sovereign markets pricing in an increased probability of a rate cut. Although the chance for a rate cut in 2016 is below 25%, the perception regarding the BoE’s monetary policy has dramatically changed. Whilst the BoE was expected to join the Fed in its normalisation journey with approximately six months delay, it appears that Carney is preparing to let Janet Yellen go it alone.

GBPUSD continues seeing resistance at 1.4354 (minor 23.6% retrace on Dec-Jan decline) and even surpassing this level, Cable is expected to face a choppy path upwards. Given the rising possibility of a rate cut, macro players will certainly stay on the sell-side for the game. Key resistance is eyed at 1.4523 (major 38.2% on Dec-Jan decline). Below this level, traders are expected to remain seller on rallies. Intermediate resistances stand at 1.4255/50 (yesterday’s support turned resistance), 1.4354 (minor 23.6%). Sentiment remains negative and a break of 1.4150 (pivot) should pave the way for a re-test of 1.4080 (last week low) before 1.4040/1.4000 comes on the radar

Will the Fed soften its tone?

The Fed decision is due later today and is going to be the major macro event of the day. As the Fed is expected to maintain the status quo, the accompanying statement will be the key discussion point. Given the China –led global rout in stock markets and significant fall in commodity and oil prices, the Fed may deliver a visibly dovish statement. As we have mentioned several times, the Fed’s normalisation plan including 3-4 rate hikes through 2016 may not be appropriate. The probability of a March hike is down to 25% from 50% in January. The market gives less than 50% probability for the second Fed hike to happen any time before September.

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