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Sterling rallied into the PMI release but eased back a touch despite the survey figures being a little better than expected. GBPUSD broke the Wed peak at 1.31524 but came back down to under 12.3140 following – we are talking very, very minor moves here let’s be clear. Bulls are struggling to hold 1.3150 but they may well rally the troops and if reclaimed later today then we could look for a push towards 1.31690, the Jan 8th high, to open up from upside. Looks very well supported at 1.31 for now.

Yes the PMIs bounced back – with the Composite PMI rising to a 16-month peak at 52.4 from 49.3 in December – but this was entirely to be expected and reflects businesses letting out a collective sigh of relief after the Conservative Party victory in the December election as it heralded an end to the paralysis over Brexit and killed off the prospect of a radical Jeremy Corbyn-led government. Businesses ought to be a damn sight more confident as a result – it does mean that we’re out of the woods . Ultimately, whilst clearly diminishing the case for a cut, I don’t see these PMI surveys as being enough to prevent the Bank from cutting – I think they have already decided on this.

The harder data we’ve seen has been a lot less auspicious. GDP is weak and inflation has come off sharply, albeit the base effect is at play. Inflation rose just 1.3% against 1.5% in November. Core CPI was a meagre +1.4% last month, vs 1.7% expected. CPI inflation rates are at their lowest since 2016. It is worth remembering that this data is backward looking and before the Tory victory, but this only adds to the sense that the BoE has a narrow window of opportunity to cut this month, based on the premise that it feels like it got a little behind the curve globally last year as its hands were tied by Brexit.

The Bank doesn’t want to get behind the curve of market expectations, and is seeking to get a jump on markets whilst still teeing up the cut. It would be following the Fed’s playbook in cutting early in order to prevent a downturn. This is the key thing to remember – the Bank does not want to let a weaker economy fester.  

Whilst there may be lots of arguments against a cut, the coordinated dovish commentary from about half of the MPC over the last fortnight appears no accident. Harder data has turned notably softer and the BoE doesn’t want to risk allowing weakness to become entrenched.

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