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GBPUSD Drops as BoE Slashes Growth Forecasts Amid Brexit Risks and Slowing Economy

GBPUSD Drops as BoE Slashes Growth Forecasts Amid Brexit Risks and Slowing Economy

Daniela Sabin Hathorn, Analyst

BoE announcement talking points

  • Key takeaways from the announcement
  • UK economic data
  • UK political landscape

Key takeaways from the announcement

GBPUSD dropped to intra-day lows of 1.2854 after the Bank of England left the rates unchanged. The drop comes on the back of a bearish outlook on the UK economy as growth, wage and inflation forecasts were all downgraded.

After a unanimous vote from all 9 members of the Monetary Policy Committee to maintain rates stable for the first-rate decision of the year, here are the key takeaways of the MPC’s views of growth and inflation.

Q1 2019

Q1 2020

Q1 2021

GDP

1.5% (Prev. 1.8%)

1.3% (Prev. 1.7%)

1.7% (Prev. 1.7%)

CPI

1.8% (Prev. 2.2%)

2.3% (Prev. 2.4%)

2.1% (Prev. 2.0%)

Bank Rate

0.7% (Prev. 0.8%)

0.9% (Prev. 1.1%)

1.0% (Prev. 1.3%)

  • Views on growth

Growth forecasts had been slashed to 1.2% for the whole of 2019, which marked the biggest reduction in GDP since 2016, representing the weakest annual growth since 2009 amid the rising risks surrounding Brexit and the slowing of the global economy.

  • Views on inflation

Inflation is expected to fall below its target of 2% in the near term due to a fall in oil prices, but it will bounce back above the target in a year’s time as they believe wage growth will pick up on the back of low unemployment figures.

  • Views on future rate hikes

The BoE restated that that gradual and limited rate rises are expected to come in the next few years. However, the committee had noted that market rates implied slower BoE tightening than in their November QIR.

UK economic data

The decision to keep rates unchanged comes on the back of key economic figures pointing towards a slowdown in growth. Figures published recently include the UK monthly services sector PMI, which fell to 50.1 in January from 21.2 in December, barely above the 50 mark that that separates growth from contraction. It suggests that Britain’s economy is flat-lining and further cuts are expected as companies prepare contingency plans ahead of Brexit. All-sector PMI was also down to 50.3 from 51.5 in December, a level which is consistent with a stagnant GDP at 0% for Q1.

UK political landscape

As Theresa May has made her way to Brussels today to re-negotiate her withdrawal agreement, which the European Union has rejected in various occasions, there is no sign that the uncertainty around Brexit is going to be resolved anytime soon. Regardless of the sentiment of a negative outcome from this meeting, the BoE is still basing its forecasts on a smooth Brexit at the end of March. But a no-deal Brexit could see a forced reaction from policy makers to reduce rates to cope with the immediate disruption to trade and the economy, which would resemble the BoE's reaction to the shocking Brexit results where it introduced a quantitative easing program and cut rates by a quarter of a point.

Brexit Latest: Sterling (GBP) Struggles as PM May Heads to Brussels

Looking ahead, as there is no confirmed exit deal as of yet, the direction of the UK economy and its monetary policy will strongly depend on the type of Brexit the UK achieves.

IG Client Sentimentshows clients are 58.1% net-long GBPUSD, a bearish contrarian indicator. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPUSD bearish contrarian trading bias.

KEY TRADING RESOURCES:

--- Written by Daniela Sabin Hathorn, Junior Analyst

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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