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GBP/USD Outlook Breaks Down on Dovish Carney, BoE Rate Cut Odds Jump

GBP/USD Outlook Breaks Down on Dovish Carney, BoE Rate Cut Odds Jump

2020-01-09 10:30:00
Justin McQueen, Analyst
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GBP/USD Analysis and Talking Points

  • GBP/USD Drops on Dovish Carney
  • BoE rate cut odds spike

GBP/USD Drops to Session Lows

GBP/USD has come under notable pressure, falling from 1.3087 to lows of 1.3018 following dovish comments by BoE Governor Carney. In turn, this has seen a repricing of near-term easing bets with the risk of a January rate cut rising to 16% from 5% likelihood.

GBP/USD Outlook Breaks Down on Dovish Carney, BoE Rate Cut Odds Jump

Source: Refinitiv

UK Growth Remains Sluggish

Governor Carney stated that with UK growth remaining sluggish and inflation below target, the central bank’s projection of a rebound in UK GDP is therefore not assured. As such, if evidence suggest that weakness could persist, this could require a prompt response in order to reinforce the expected recovery in UK growth and inflation. Alongside this, the Bank of England have based a sizeable chunk of their growth assumption on a boost in investment amid the reduction in Brexit uncertainty. However, given that more businesses (42% from 34%) do not expect Brexit uncertainty to be resolved until at least 2021, investment could remain relatively subdued, thus putting pressure on the BoE’s assumption.

BoE Carney’s Last Meeting

The Governor noted that there is a debate with regard to the merits of near-term stimulus. Although, this is not entirely new, given that both Haskel and Saunders have voted for a 25bps cut at the last two MPC meetings. That said, this will make the upcoming meetings a live one, while odds of a January rate cut have risen, more evidence over the next two weeks would be needed to push for a cut. As such, there is a potential for the new BoE Governor, Andrew Bailey (March 15th) to mark his first MPR with a cut at the May MPR.

Speculative Net Longs Could Exacerbate GBP/USD Pullbacks

Towards the end of 2019, investors had been piling in GBP, resulting in the largest net long since May 2018. However, with the BoE providing a dovish signal, near-term repricing of easing could exacerbate pullbacks in GBP and speculators look to liquidate their bullish bets.

GBP/USD Outlook Breaks Down on Dovish Carney, BoE Rate Cut Odds Jump

Bank of England Hawk Dove Scale

GBP/USD Outlook Breaks Down on Dovish Carney, BoE Rate Cut Odds Jump

Source: DailyFX

GBP/USD Price Chart: 1-minute timeframe (intraday)

GBP/USD Outlook Breaks Down on Dovish Carney, BoE Rate Cut Odds Jump

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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