GBP/USD might resume the larger bearish trend again now

GBP/USD Retreats Below 1.30, As the Picture Turns Dovish for the BOE

Posted Saturday, December 21, 2019 by
Skerdian Meta • 3 min read

The situation in UK has been very confusing for GBP traders in recent years, as the country struggles with Brexit. The political situation has been volatile, with Theresa may failing three times to pass her Brexit deal and eventually giving up and leaving the hard work to Boris Johnson. Brexit has been postponed a few times and BoJo barely reached another Brexit deal with the EU ion the last minute back in September.

But, his deal was rejected by the British Parliament again and he called for general elections, which took place on Thursday last week. So, the uncertainty has been immense, hence the  inventories build up by the companies in the UK during the last several months, just in case the UK will end up crashing out of the EU.

This uncertainty and confusion has been the reason that the GBP has been pretty bearish. But, the prospect of new elections which certainly favoured the Conservatives, helped the GBP turn bearish back in October when elections were announced and GBP/USD rallied from 1.20 to 1.30 back then. It traded sideways below 1.30  until before the elections, and when results started coming out, GBP/USD surged above 1.35. Tories won a comfortable majority, which gives a clear direction, Brexit before 2020. no more extensions, as BoJo said yesterday.

This removed the immediate uncertainty, of further extensions, which would make it more difficult for companies operating in UK to predict the future. But, everything else remains as it was and the Bank of England confirmed the uncertainty for UK politics and businesses in the future.

Below is the monetary policy decision from the BOE:

  • BOE leaves bank rate unchanged at 0.75%
  • Prior 0.75%
  • Votes 7-2 vs 7-2 expected
  • Asset purchase target £435 billion
  • Corporate bond target £10 billion
  • Haskel and Saunders dissented, voted to cut the bank rate by 25 bps
  • BOE says can’t tell yet how much policy uncertainties have declined since election
  • Sees continued signs that UK labour market is loosening but it remains tight
  • Partial de-escalation of US-China trade war gives some additional support to outlook
  • If global growth fails to stabilize or Brexit uncertainties remain entrenched, monetary policy may need to reinforce expected UK recovery
  • Further ahead, if risks do not materialize and economy recovers broadly as expected, some modest tightening of policy – at gradual pace, limited extent – may be needed

The BOE does say that they can’t tell yet how much policy uncertainties have declined since election. They added that if global growth fails to stabilize or Brexit uncertainties remain entrenched, monetary policy may need to reinforce expected UK recovery. GBP traders quickly came to their senses after the initial optimism and GBP/USD has fallen back below 1.30. BOE member Haskel went further, saying that the the data justifies rate cuts, as shown below.

Comments by BOE policymaker, Jonathan Haskel:

  • Current data justifies looser monetary policy
  • UK outlook has weakened in the past year
  • Cutting rates now would be insurance against rates getting stuck near zero in future
  • Downside risks linger over BOE forecasts
  • Brexit uncertainties may become entrenched and world economy may weaken
  • Sees substantial chance of “quite weak” UK inflation in the near-term
  • BOE may need “slow and gradual” rate hikes if the path to a post-Brexit trade agreement is smoother than expected

Haskel is quite right in his comments. The UK economy has weakened considerably in recent months and almost all sectors are in contraction/recession. The global economy is also weakening and the public in the UK is quite divided, which is not good for the sentiment. On top of that, the UK will have to leave the EU in a year, which is a very short time for a trade deal between the two. So, if anything, the situation seems quite bearish for the GBP for 2020.

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