Another central bank joins the monetary easing train

Just one day after the Reserve Bank of Australia (RBA) joined the central bank monetary easing train with an unexpected interest rate cut, another passenger has decided to board the train. Moments ago, the People’s Bank of China (PBoC) became the 16th central bank to ease monetary policy this year with the central bank announcing it would lower its reserve requirement ratio for banks by 0.5%, in a move to boost liquidity and support the economy. This move will be seen by many as a direct response to continued indications of slowing domestic momentum, with the most recent warning sign being the early week HSBC Manufacturing PMI showing manufacturing activity had contracted in January.

The repeated signs of economic growth losing momentum have mostly been inspired by domestic data such as the housing sector, retail sales and more recently, manufacturing. Therefore, announcing a cut in the required cash reserves for banks will be seen by the markets as a positive move to reinvigorate economic growth. However, with the economy receiving criticism in the past for bad debts I was personally expecting the next monetary easing move to be another interest rate cut. A combination of slowing economic growth and the decline in the price of oil has correlated in weak inflation levels and if future data refuses to erase concerns over economic momentum, I expect an interest rate cut to be next. Both the Australian Dollar and Kiwi Dollar are trading slightly higher following the announcement from the PBoC.

In line with expectations, the crude oil bulls seem to have hit a wall prior to the US crude inventory data announcement this afternoon. Brent and WTI advancing by $10 over the past three days has surprised most people, although the major catalyst behind the comeback has been the unexpected drop in US oil rigs, alongside BP pledging to cut back spending, providing hope that oil producers are potentially reacting to such an aggressive oversupply of the commodity in the markets. The bulls are going to face a stern test in a few hours though, because the US crude inventory data is expected to show more oil being produced than originally forecast. If this is confirmed and anxieties over an oversupply resurface, there is every chance this comeback might be short lived.

After appreciating due to the “risk on” sentiment from investors that emerged last night, the GBPUSD bulls found further momentum following the UK Services PMI showing that growth had picked up in January. The services sector represents such a vital proportion of the UK economy that investors were more than pleased to find out that sector activity had rebounded from the 17-month low in the previous month. This also represents the third PMI this week to come in above expectations, with readings earlier this week also positive for the construction and manufacturing sector.

The GBPUSD has now appreciated by 200 pips in just over a day, however I am still not bullish on the pair and just see this as a continuation of a trading range set last month. The pair needs to cleanly extend above 1.5268 to change my assessment but with issues such as unexpected disinflation risks and continually pushed back UK interest rate expectation concerning investors, it’s going to be difficult for the pair to make the jump. There is also a Bank of England (BoE) interest rate decision announced tomorrow, which is likely to only reiterate to investors that we are a long time away from the UK rate rise that many were fascinated about only a few months ago.

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