EU MORNING: To Cut Or Not To Cut, That Is The Question

*Sterling volatility creeps higher on dovish BoE
*Next two weeks of UK data threaten Carney's fairytale ending
*European equities bound for soft open following mixed Asia
*US reporting season to defend USD after weak NFPs 

BoE pushes Sterling volatility higher

A week in markets tends to be a very, very long time. This has proved especially true as the outlook for Sterling becomes less clear following last week's dovish-leaning BoE comments. GBPUSD 30-day historical volatility, a measure of how much the currency can move up or down, is now a touch above December highs.

BoE dove camp adds two members 

Sterling has been pulled down by the dovish speeches of both MPC members, Carney and Tenreyro, despite market pricing showing a slim chance for a 25bps rate cut.

Carney caused initial jitters after citing a debate about the merits of near-term stimulus, and that 250bps of conventional and unconventional policy space was available. Tenreyro, not originally viewed as a dove at the MPC's Dec. meeting, also mentioned he was open to a rate cut should downside risks emerge in the UK economy.

Furthermore, as of the weekend, external MPC member Vlieghe joined the BoE dove camp backing a rate-cut if UK data failed to improve soon. Still, the BoE needs one more MPC member if a January cut is to be genuinely on the cards and better reflected in Gilts market pricing.

BoE looks very data-dependent

In his last meeting as BoE Governor, Mark Carney is unlikely to exit with a bang unless the UK economy forces his hand. That said, key data points set to fall over the next fortnight will be crucial to the BoE's January rate decision.

This includes CPI, retail sales, jobs, and arguably the most important, UK PMIs on Jan 24. MPC member Saunders, one of the BoE's dovish dissenters in December, is also set to speak mid-week, which could make for more bearish Sterling price action should he further emphasize downside risks to the UK economy.
With a burst of UK data also due out tonight at 9.30am GMT, in Nov. GDP, industrial and manufacturing output, and goods trade balance; we think a major GBPUSD reaction is probably unlikely as the currency rears its head in wait of bigger fish to fry over the next two weeks.

A recap of Non-farm Payrolls

Slightly under the mark, US December job growth printed 145k against consensus of 160k, while average hourly earnings registered a meagre improvement of 0.1% and unemployment fell unchanged from November at 3.5%. The overall effect saw equity markets dented by Friday close with major US benchmark S&P 500 down over 200pts alongside a broader sell-off in equities, and Gold back up to US$1,560.

However, despite the disappointing result, we think it does little to derail the story of US exceptionalism or stem flows associated with long USD trades over the course of 2020. With US reporting season starting on Jan 14 and US retail sales due out on Thursday, we see upside risks to the week on a string of better corporate results and improved earnings growth.

US banks will be of particular focus given how entrenched they are in the global economy with their far-reaching loan books; any signs of weakness could spark a material correction across equities.