No Fireworks Expected From BoE
Fiona Cincotta December 18, 2019 11:06 AM
With a resounding Conservative win in the elections the UK will almost certainly be leaving the EU on 31st January 2020. For a brief moment there was clarity over Brexit and the UK domestic political situation. However, Boris Johnson has put a limit on UK-EU trade talks of 1 year until December 2020, meaning no deal Brexit is back on the table.
Consequently, the BoE have little clarity still on whether the UK will leave the EU with a trade deal or in a disorderly, cliff edge fashion at the end of next year.
The BoE is expected to keep monetary policy unchanged, with the base interest rate at 0.75%. There will be no press conference following announcement.
Flash PMI readings for both the manufacturing sector and the dominant service sector weakened further in December. The composite PMI, a good indicator of the health of an economy, declined -0.8% to 48.5, its lowest level since April 2009. The service sector PMI struck a 9-month low, whilst manufacturing slumped to 47.4, a 4-month low, as Brexit uncertainty weighed on demand and confidence. Given Boris Johnson’s refusal to extend the transition period, Brexit uncertainty could be with us for another year.
The unemployment level improved, down to 3.8%, its lowest level since January 1975. However, wage growth eased to 3.5%, down from 3.6%. Inflation remained steady at 1.5%. However, further slowing in wage growth could lead to further deceleration in inflation.
In November BoE policy makers voted 7 -2 in favour of leaving policy unchanged citing concerns over inflation and the “labour market turning”. We expect Michael Saunders and Jonathan Haskel to dissent again.
Whilst the December meeting is expected to be a non-event, data suggests that the economy is struggling. With Brexit uncertainty set to continue, a rate cut in Q1 2020 could be on the cards. However, for now the pound's reaction could be muted.
Whilst no fireworks are expected, investors will be watching closely to see who will replace Mark Carney.
GBP/USD levels to watch:
The pound has given back its election inspired gains. Support can be seen at the pre election low of $1.3050. The price is edging cautiously higher in early trade on Wednesday. A break below $1.3050 would signal a bearish trend.
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