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Brexit Gridlock Likely to Keep BoE Rates Unchanged - Preview

Brexit Gridlock Likely to Keep BoE Rates Unchanged - Preview

2019-03-21 10:26:00
Daniela Sabin Hathorn, Junior Analyst
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BoE Interest Rate Announcement Talking Points

  • UK economic data
  • UK political landscape
  • Key takeaways from the previous Bank Rate announcement

The Bank of England will wait and see how Brexit unfolds before deciding its next move on interest rates given that inflation is “reasonably well behaved”, BOE rate-setter Michael Saunders said at a conference at Imperial College London at the beginning of the month. The need for monetary tightening in the future does not mean it needs to take place now. A range of alternative Brexit outcomes are possible, and there may be very different implications for the British economy and its monetary policy.

Sterling (GBP) is not expected to have any major directional push after the announcement as most of its focus continues to be on Brexit. GBPUSD remains weak despite the FOMC’s dovish outlook yesterday.

US Dollar Dives After March FOMC Meeting Reveals Dovish Fed.

GBPUSD Daily Price Chart

GBPUSD daily price chart before Bank of England rate announcement

UK Economic Data

Despite the uncertainty surrounding Brexit, employment has hit its highest level since 1971 and wages are increasing at their fastest rate in ten years, giving the British economy a more positive note after months of negative economic figures. The BOE downgraded their growth forecasts to 1.2% (2019) and 1.7% (2020) last month, the biggest reduction in GDP since 2016, representing the weakest annual growth since 2009.

The rise in food and alcohol prices pushed inflation to 1.9% in the month of February, up from 1.8% in January and retail figures published today have been better than expected, with retail sales 0.4% higher in February than in January with a strong increase in fuel and online shopping.

Sterling (GBP) Slips on Renewed Brexit Confusion, UK Inflation Stable.

But some economists believe that this positive run may be short-lived as turmoil surrounding Brexit continues to rattle Sterling.

UK Political Landscape

After rejecting both a deal presented by PM Theresa May and a no-deal Brexit, the UK is set to push back Brexit for another 3 months. Theresa May came back from Brussels yesterday with a concession from the European Parliament, whereby they are prepared to accept a short-term delay of three months if she is able to gain the support from the British Parliament of her withdrawal agreement, which has already been widely rejected twice. It is not clear if the PM will have the support to pass her deal, given that she is even allowed to bring it back to Parliament, after Parliamentary Speaker John Bercow ruled out Theresa May being able to bring her agreement to Parliament for a third vote unless it has “substantial changes”.

Regardless of the outcome on Brexit, the BOE’s reaction may not be instant as it will always try and focus on its main goal of maintaining the 2% inflation target.

Key Takeaways From the Previous Bank Rate Announcement

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%)

IG Client Sentimentshows GBPUSD retail traders are 51.0% net-long, a bearish contrarian bias. However, recent daily and weekly positional changes give us a stronger bearish bias for GBPUSD.

Recommended Reading

Eurozone Debt Crisis: How to Trade Future Disasters – Martin Essex, MSTA, Analyst and Editor

KEY TRADING RESOURCES:

--- Written by Daniela Sabin Hathorn, Junior Analyst

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