Carney sounded a lot more dovish than hawkish, but the market sees what it wants to see

US Session Forex Brief, Feb 7 – EU and the BOE Cut Growth Forecasts

Posted Thursday, February 7, 2019 by
Skerdian Meta • 4 min read

With Brexit being where it is right now, a total mess I would say, the Bank of England meeting was bound to take all the attention today. Although, the European Commission was the first to kick the ball today as they released the economic forecasts for 2019 and 2020. GDP growth forecasts were revised lower for all the major Eurozone countries and inflation expectations were revised lower as well.

With the economic weakness and the recent data we have seen in Europe, it is not a big surprise to see such negative revisions. Today’s German industrial production number came negative once again which is the fifth negative reading in the last six months, while factory orders posted a massive decline yesterday. And that’s without taking into consideration the US tariffs on European cars which should come pretty soon. EUR/USD stretched the downtrend further after that report was released. 

The Bank of England met at 12:00 GMT as they always do. They left interest rates unchanged at 0.75% as widely anticipated and the MPC votes also remained at 0-0-9 in favour of keeping rates unmoved. Although, they cut economic growth forecasts for this year and 2020 to 1.2% and 1.5% respectively from 1.7% previously estimated.

They also expect the CPI (consumer price index) inflation to fall below 2% which is the lower target for the BOE but that’s supposed to be temporary. BOE Chairman Mark Carney held a press conference soon after, but the main take from his comments was the same as before – the BOE cannot determine the monetary path before Brexit takes a direction, which will then decide which way the BOE will go.

  • German Industrial Production – Industrial production has been declining in the last four out of five months. Last month’s report which was for November came at -1.9% but was revised higher to -1.3% today. The number for December was expected to show a 0.8% increase in production, but instead it came at -0.4% which makes this the fifth negative month in Q2 of 2018.
  • UK Halifax HPI – The Halifax house price index was expected to decline by 0.6% in January, but it declined much more as the actual number came at -2.9%. Mark Carney did mention that the consumer demand and the housing market have been hit by Brexit uncertainty and this indicator shows just that.
  • Italian Retail Sales – Retail sales for November were revised a tick lower to 0.6% against 0.7% previously. For December, the sales were expected to decline by 0.1%, but instead they declined by 0.7%. The Italian consumer is not feeling any better either.
  • EU Economic Bulletin – The European Commission released the economic bulletin and economic projections for the next two years which look as follows:
    • Eurozone 2019 GDP growth seen at 1.3% (previously 1.9%)
    • Eurozone 2020 GDP growth seen at 1.6% (previously 1.7%)
    • Eurozone 2019 inflation seen at 1.4% (previously 1.8%)
    • German 2019 GDP growth seen at 1.1% (previously 1.8%)
    • German 2020 GDP growth seen at 1.7% (unchanged)
    • France 2019 GDP growth seen at 1.3% (previously 1.6%)
    • France 2020 GDP growth seen at 1.5% (previously 1.6%)
    • Italy 2019 GDP growth seen at 0.2% (previously 1.2%)
    • Italy 2020 GDP growth seen at 0.8% (previously 1.3%)
    • Expects Italy Q1 GDP growth to be 0.0% q/q
  • BOE Interest Rate Decision – The Bank of England kept interest rates unchanged at 0.75% as expected today. The votes were 0-0-9 in favour of keeping them unchanged. Asset purchase target remains at £435 billion, while corporate bond target at £10 billion, also unchanged. The BOE expects the CPI (core price index) inflation to decline below the 2% minimum target in coming months, but that is expected to be temporary.
  • BOE Monetary Policy Summary – The 2019 GDP forecast comes at 1.2% against 1.7% previously in the monetary policy summary. 2020 GDP forecast is revised at 1.5% against 1.7% previously CPI inflation in one year is expected higher at 2.35% against 2.10% previously. CPI inflation for the two year period is expected at 2.07%, down from 2.12% previously.
  • BOE’s Mark Carney Speaks – Carney’s opening comment was that the UK economy as a whole is not prepared for a no-deal Brexit case. That could mean considerable contraction of the economy and the Brexit uncertainty is causing the data to be pretty volatile. The consumer demand and the housing market have been hit by Brexit uncertainty. At the same time, businesses are building up stocks as contingency.  The fundamentals for the UK economy are solid and the labour market is tight. If there is clarity on the Brexit deal soon, the UK economy should see some upside since it has the potential. Although, real income growth is an upside risk for forecasts. If there is a no-deal Brexit shock, that would increase the chances of negative growth. Overall, the BOE cannot predict the path of monetary policy after Brexit. That is the main comment for me. I mean, we cannot ask them what will happen because they’re not politicians. Brexit will drive the economy, the GBP, the BOE monetary policy and Carney know it. They only have to respond accordingly.

The US Session

  • US Unemployment Claims – The unemployment claims for December jumped around 30k higher as they came at 253k last month. Today’s report which is for January, was expected to fall back to 220k which is the normal range, but came at 234k.
  • FOMC Member Clarida Speaks  FOMC member Richard Clarida is due to speak about the neutral interest rate at the Czech National Bank conference in Prague. Audience questions are expected. The FED is approaching neutral rates, so it will be interesting to hear where neutral is for Clarida.

Trades in Sight

Bearish EUR/USD

  1. The trend has turned bearish for more than a week
  2. Fundamentals are deteriorating
  3. ECB cut GDP growth forecasts
  4. The 20 SMA keeps pushing the price lower


The 20 SMA is not letting go

EUR/USD has made a bearish turnaround and it has been on a bearish trend which has been just like a line in the last 5-6 trading days. There has been no retrace higher whatsoever and the 20 SMA is to blame for that, since it keeps pushing the price lower. The fundamentals are not helping with the terrible economic numbers we have been seeing in recent months and the EU just cut growth forecasts further today. So, if we see a decent pullback higher, we will try to get short on this pair.

In Conclusion

The Euro continues the downtrend after the negative revision to GDP growth in the next two years. The GBP also lost around 50 pips after the BOE statement earlier today, but Mark Carney left the impression that if Brexit somehow ends up with a positive outcome soon, then the fundamentals of the British economy support rate hikes. The GBP has reversed and it climbed about 150 pips higher, but that’s just wishful thinking to me.

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