FTSE breaks below 7000 ahead BoE weighed down by trade war fears

The FTSE has started Thursday lower following the Fed rate decision last night, further concerns over trade wars and ahead of the Bank of England rate announcement that midday.

As was widely expected the Fed raised interest rates by 25 basis point. However rather than giving the markets a boost, there was a decidedly dovish response to the hike and to Jerome Powell’s not unambiguously hawkish press conference. 

The Fed failed to lift the future path of hiking for 2018, something, keeping the outlook at 3 rises across the year, rather than the 4 some trader had been optimistically hoping for. 

Despite Powell remaining upbeat over the economy, Powell’s slightly downbeat comments over inflation, wages and trade concerns weighed on the dollar heavily, sending GBP/USD to a monthly high, USD/JPY to 105.50 and a weaker close across the board on Wall Street.

A more hawkish BoE?

The pound is trading higher this morning as we head towards the BoE decision; the centre point of this pivotal week for sterling. There will be no press conference at this meeting, so investors will extract all that they can from the voting spilt and the statement.

The BoE are broadly expected to keep rate on hold. However, there has been growing optimism that a late spring hike could be on the table. The markets are currently pricing in a 66% probability for a May hike, which shoots up to 75% in June. 

Any hawkish slant from the BoE in light of clearing headwinds, thanks to the Brexit transition deal and wages increasing above inflation, could give the pound an extra boost pushing GBP/USD towards $1.4280, a late Jan high. 

Traders will be particularly keen to see a voting split other than 9-0, for confirmation that the more hawkish MPC members are already setting their sights on a hike.

On the downside, failure by the BoE to fan spring hike optimism could see GBP/USD test $14150 in the near term before looking towards support at $1.4070.

Trade war fears resurface

After central banks have done a fine job of attracting trader attention away from Washington this week, news that Trump is turning up the heat on China with new trade curbs has sent a chill through the market, weighing on risker assets. 

The White House is drawing up a plan to slap tariffs on imports from China to the value of $30 billion, as US protectionism hits a new level; stoking fears of a strong retaliation and an all-out trade war.

With a stronger pound, fears of a trade war and a lower close in the US, it is hardly surprising that the FTSE is struggling in morning trade. The FTSE has slipped below the key psychological level of 7000 and will look to target 6970 on continued weakness.