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GBP pointed to Brexit risk despite rally on Hawkish BoE

Market Analysis


BoE Inflation Report and Minutes: The central bank raised its 2018 GDP projection to 1.8% from 1.6% foreseen at the November inflation report. 2019 growth was revised to 1.8% from 1.7% before. The BoE also trimmed its non-inflationary rate of unemployment (more simply put as the equilibrium rate of unemployment) to 4.25% from 4.5% (UK unemployment was last indicated at 4.3%). On inflation, the BoE announced that it is shifting back to targeting CPI over a two-year forecasting horizon, rather than three. It projects the annual CPI rate to be 2.16% in Q1 2020.

Sterling has surged on the BoE’s sea-change policy signal, presently near highs and showing an average 1% advance on the dollar, euro and yen. Cable clocked a three-day peak at 1.4014, extending a recovery from Tuesday’s three-week low at 1.3836. The pound’s gain has, meanwhile, marked the latest leg of a recently volatile price action in EURGBP, with the cross tumbling back to late January lows, by forming a rounding top. A rounding top consider being a bearish candlestick pattern. The pair is currently trading at 0.8750,  after breaking the 20 and 50-Day MA, along with  Daily Support levels at 0.8793 and 0.8753. Next Support levels come at 0.8720 for short-term , and 0.8670 or longer-term. 

The principal takeaway for markets was from the MPC judging that monetary policy would need to be tightened “somewhat earlier” and by a “somewhat greater extent” than previously envisaged, assuming the economy evolves as forecast. The inflation report upped growth forecasts for this and year and next, though the BoE repeated that its projections assume that households and companies base their decisions on the expectation of a smooth Brexit adjustment, which remains a “significant” source of uncertainty. How Brexit evolves, and how other central bank polices develops, will be key for the bigger-picture path of sterling, and uncertainty about these may curtail the currency’s upside potential over the nearer-term.

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Andria Pichidi

Market Analyst


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