The Bank of England (BoE) met this morning and Governor Mark Carney stepped up to the plate to join his fellow central bankers in cutting the country’s interest rate (by 25bps to 0.25% - the first cut in 7 years) and expanding its quantitative easing program (by £60 billion to £435, including £10 billion corporate purchases).
And so the Currency Wars continue!
In the chart below we update our levels on the GBP/USD, currently showing intermediate TREND broken @ $1.39 with an additional -1.8% downside to our immediate term TRADE support level of $1.29. Following today’s announcement the cross is down -1.5% and counting!
BoE Commentary and updated Outlook:
- The biggest signal to the market in Carney’s remarks is the willingness to do more (rate cuts and QE) if warranted. Carney characterized the economic outlook as changed “markedly”, and the Bank is ready to cut rates to zero if necessary.
- Carney’s updated economic forecasts suggest increased downward pressure:
- 2017 GDP cut to 0.8% from 2.3% in May; 2018 GDP cut to 1.8% from 2.3% (see chart)
- Inflation at 2.1% in 2017 and 2.4% in 2018
- Business investment down 3.75% in 2016 vs 2.5% growth in May, and down 2.0% in 2017 vs 7.25% growth in May.
- Housing investment forecast up 1.25% in 2016 vs 4.0% in May, down 4.75% in 2017 vs 7.25% growth in May.
- This policy stance should continue to pull the Pound Sterling and gilt yields lower!
Does Brexit matter? Yes!
While Carney’s commentary may elude linking any economic weakness to the decision to Brexit, the fact remains that Brexit spells great uncertainty to the evolution of trade arrangement with global partners, especially the EU. While we believe a swift cabinet change is overall positive in terms of market sentiment (vs a lingering David Cameron, for example), we expect Brexit to continue to weigh on consumer and business confidence throughout the year.
In case you missed the call we hosted with the international law firm of Squire Patton Boggs on the implication of Brexit (note, we’ll be continuing in a series of call on the subject), an audio replay is available.