Bank of England Lowers UK Growth Outlook As Headwinds Strengthen; Sterling Vulnerable
THE TAKEAWAY: BoE lowers GDP & CPI outlook > UK growth is easing > GBPUSD drops
In a largely expected move the Bank of England said in its Inflation Report that the “UK growth outlook [is] is weaker than in May” adding that risks lie to the downside. The central bank also said that while CPI is still expected to hit 5% in the near-term it will “most likely be [a] little below 2% in medium-term”. The central bank said that the greatest risks to UK growth lie abroad, primarily stemming from the euro-area debt crisis, but also noting the slowing trend of global growth which is set to affect the UK too.
Bank of England Governor King said in his testimony that there is a limit to what monetary policy can achieve and the central bank can’t influence short-term inflation. On the euro-area debt crisis he said that the central bank can’t “meaningfully quantify risks from the euro-area” but agrees that it does pose the “greatest risk” to UK growth. Governor King went on to say that headwinds to the economy are becoming stronger by the day and the economy will only recovery “modestly” through 2012 as underlying weakness may persist for longer than expected.
Sterling took a dive in the aftermath of the dovish IR report from the Bank of England as the central bank lowered its growth estimates for the UK and CPI expectations. Despite the initial spike below the well supported 1.6200 level Gbp/Usd managed to pare its declines with relative ease to trade back by pre-release levels intraday. A clean break of the 1.6200 level should open a move back toward the psychological 1.6000 level, for a full technical outlook click here.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.