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GBP Fundamental Forecast: BoE Expects the UK to Narrowly Avoid a Recession

GBP Fundamental Forecast: BoE Expects the UK to Narrowly Avoid a Recession

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Pound Sterling Fundamental Forecast: Bearish

  • The Bank of England may just have raised rates for the last time as it suggests we may have reached peak inflation, but this view is fraught with uncertainty
  • The Bank’s December forecast confirming a recession in Q4 2022 was revised by the narrowest of margins. UK Q4 GDP is out this coming Friday
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The bearish sterling bias of this forecast takes into consideration the tendency for the pound to dip after rate hikes as the cost-of-living squeeze worsens, the potential end of rate hikes and a confirmed technical recession, or the narrowest of escapes, which is certainly no reason to celebrate.

GBP/USD Daily Chart

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Source: TradingView, prepared by Richard Snow

The Bank of England May Have Just Hiked for the Last Time

This week was by far the busiest of the year from the perspective of high impact, market moving data all clustered around the middle to the end of the week. Three major central bank rate decisions, crucial employment data and services PMI numbers ensured a roller coaster ride for price action and we look to next week as the dust settles.

The Bank if England’s monetary policy committee (MPC) dropped language used in previous statements that referred to “further increases in the bank rate may be required” or that it will “respond forcefully” on rates – which suggests, if inflation continues to head lower from here, that the current 4% level may turn out to be the terminal rate for the UK.

With that being said, the Bank Governor Andrew Bailey stated that this is uncharted territory for the MPC at a time when inflation has breached 10%. If inflation proves to be more persistent and widespread, the MPC aren’t opposed to hike again and another 50 bps hike cannot be ruled out, although, markets only appear to be pricing in a hold or a 25 bps in March with any real conviction at this moment.

Implied Probabilities Derived from OIS Curve

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Source: TradingView, prepared by Richard Snow

Would a Narrow Miss of a Technical Recession be Reason to Celebrate?

The Bank of England has revised higher its November forecast for Q4 GDP from the slightest of contractions to the slightest measure of ‘growth’, from -0.1% (QoQ) to + 0.1%. Whether we get the positive or negative figure is rather academic at this point. The main problem is the data has deteriorated and certainly isn’t encouraging at all.

However, in the event of a negative print, the UK economy would fall into a technical recession which is defined as two successive quarters of negative economic growth and such bad news has the potential to snowball as negative sentiment spreads through the market.

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Major Event Risk in the Week Ahead

After a massive week the economic calendar cools off in the number of high impact data releases, which, for the UK, appears at the end of the week with that crucial GDP print and a potential move lower in the impressive University of Michigan Sentiment preliminary figure.

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--- Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

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

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