The market stabilised somewhat during the first week of February, at a level slightly above the recent lows seen. The Bank of England Interest rate decision was announced on Thursday, once again indicating no interest rate rise. However, Ian McCafferty, who had previously been voting for higher interest rates, unexpectedly voted for no change. This highlights the perceived greater downside risks to inflation and pushes back the prospect of rising interest rates in the UK further. Furthermore, the Bank also cut its UK GDP growth forecast for the year to 2.2%, down from 2.5% it predicted in November. This more negative rhetoric from the Bank of England is mostly derived from global investment risks rather than particular problems domestically. Wage growth is still expected to be strong although somewhat weaker than previously predicted and a weaker pound will give a welcome boost to exporters.

While David Cameron’s negotiations with the EU are still ongoing, the prospect of a referendum on UK membership now seems likely to occur in June. It is currently unclear which way the public vote will fall, and the uncertainty of what a vote to leave would mean for the UK is likely to cause further market volatility if polling remains close going into the referendum. Furthermore, there may be further repercussions within the EU itself if the UK were to leave, with some suggesting that it may be the beginning of the breakup of the EU project.

On Friday, the US jobs report was broadly positive as investors focused on a fall in the unemployment rate to 4.9% and a much firmer than expected rise in hourly earnings as the US economy added 151,000 in January. This news resulted in a strengthening of the dollar as investors saw it as further bolstering the case for the Federal Reserve to raise rates. The US jobs market has remained stubbornly strong through a period of financial market turmoil and a strong dollar, perhaps indicating that the overall picture is not as negative as the current market sentiment suggests.

This week there will be announcements for German GDP on Thursday and US retail sales on Friday.

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