GBP/USD: Renewed Brexit hopes lift cable to key level as BoE remains on hold
Fawad Razaqzada November 1, 2018 10:10 AM
The Bank of England has revealed the latest decision on interest rates, reported the meeting minutes, which include the breakdown of the votes, and published the latest Quarterly Inflation Report today. After the delayed rate hike in August, when the Monetary Policy Committee voted to increase the base rate for only the second time since June 2007, policymakers have since returned to the familiar hold. And that was the case again at today’s meeting, as interest rates and QE were held unchanged at 0.75% and £435 billion, respectively, in a unanimous vote. The MPC is not expected to raise rates again until next year, despite inflation running above the BoE’s 2% target. Concerns over the economic impact of Brexit and global trade means the BoE has little choice but to ignore the sharp rise in price levels.
The biggest worry for the Bank is if the UK were to crash out of the EU with no Brexit deal. The BoE has also stated that the global economy is more uneven and that downside risks have risen. Domestically, the BoE estimates that the economy expanded 0.6% in the third quarter, but that growth will slow to 0.3% in Q4. It has also trimmed its GDP forecast for 2019 to 1.7% and expects to see similar rates of growth for the subsequent years. Nonetheless, the Bank has said that the output gap has closed and that the economy is to run hot from late 2019. This is an indication that rates may start to rise slightly more aggressively towards the latter parts of next year, although the Bank says they will be “gradual and limited.”
But make no mistake about it, the pound’s rebound this week has been largely due to positive Brexit-related headlines than anything else, including today’s inaction from BoE. Indeed, this week’s UK economic data has been poor: the Markit Manufacturing PMI dropped to its slowest level since July 2016 at 51.1 vs. 53.0 expected, while the CBI Realized Sales index fell to just +5 in October from +23 previously, missing forecasts of +27.
The pound’s rally was sparked on Wednesday by comments from Brexit secretary. Dominic Raab told parliament that the UK could conclude a withdrawal agreement with the EU by November 21. Raab stated that he “would be happy to give evidence to the Committee when a deal is finalized, and currently expect 21 November to be suitable.” As my US colleague Matt Weller reported HERE, “While the deal could obviously still fall through, the inclusion of a specific date gives the statement more substance and has bolstered GBP bulls’ spirits.”
Indeed, sentiment was very bearish earlier this week. The GBP/USD briefly dipped below 1.27 handle after rating agency Standard & Poor’s warned that the risk of a no-deal Brexit was rising and that such an outcome could trigger a recession and hit government debt ratings. Now the cable finds itself more than 200 pips higher at 1.2920 at the time of writing. Incidentally, the 1.2920/40 area was a prior support zone for the cable, so it could go down a little from here ahead of US nonfarm payrolls on Friday. The key short-term support that needs to hold now is at 1.2830. A break back below this level would be bearish in our view. However, if that 1.2920/40 resistance breaks then we could see the cable rise towards the bearish trend line towards 1.3000-1.3020 next.
Source: TradingView and FOREX.com.
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