GBP/USD Analysis and Talking Points
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.
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.
Bank of England Hawk Dove Scale
Source: DailyFX
GBP/USD Price Chart: 1-minute timeframe (intraday)
--- Written by Justin McQueen, Market Analyst
To contact Justin, email him at Justin.mcqueen@ig.com
Follow Justin on Twitter @JMcQueenFX
