BoE Brexit report key risk to GBP today

Mar 08, 7:27 am
Mark Carney_BoE

Image via Bank of England/Flickr; Mark Carney, Governor, at the Bank of England Open Forum, Guildhall, London

The Bank of England Governor, Mark Carney is due to hit the wires in a short while from now around 0915 GMT. Alongside the BoE Governor, Deputy Gov. Jon Cunliffe is also expected to speak before the Treasury committee. On the agenda is BREXIT. A few weeks ago, the BoE’s inflation report hearing saw the Treasury committee touch upon the Brexit issue, which was brushed aside then noting that the BoE would release a detailed report on March 8th, today.

It is quite likely that the BoE’s report will merely outline the pros and cons on the risks of a Brexit. In the previous Treasury hearings, Carney said that the Bank of England would not make any judgments on the outcome of the referendum. However, it would be hard to expect how the currency will react given that the BoE will have to answer to the Treasury committee, which is made up of both In and Out campaigners. At best, the British Pound is likely to remain free to interpretation and how the markets digest the report and the Q&A. On February 23rd Treasury hearings, Carney categorically noted that “We (BoE)  are treating this vote exactly how we treat any other political event, which is not to make any judgment on the outcome and assume a status quo continues”.

Yesterday, the Bank of England announced that it would give commercial banks additional liquidity in the fortnight ahead of the referendum due on June 28th. The liquidity operations are scheduled for June 14, 21 and 28. The BoE expects to use this opportunity to adequately fund the British banks from running out of funds, a sign seen by many as the authorities start to grow nervous on the outcome of the referendum. The announcement by the Bank of England on additional liquidity for banks was criticized by Brexit’s ‘Out’ campaign calling it ‘Project Fear’.

The British Pound is likely to come under pressure from the event and with GBPUSD currently looking bearish on the intraday time frame, there is scope for the Cable to decline towards 1.402 – 1.40 support level. The Cable which fell to historic lows a few weeks ago managed to quickly recoup its losses last week as the Pound surged strongly against the US Dollar. GBPUSD is currently flat trading at $1.426 and is up 2.85% higher since February 26th lower close at $1.3866.

EURGBP, which was trending strongly has so far failed to make any convincing gains above 0.78 level and with the ECB’s meeting due on Thursday, the Euro is likely to come under downside pressure with 0.755 coming in as the next key level of support to the downside with prices currently trading in a steep ascending wedge pattern. Of course, in the event of a break above 0.78, EURGBP could remain flat but the upside in the currency pair is likely to fizzle out or at the very least range sideways into Thursday.

EURGBP - Daily chart, ascending wedge
EURGBP – Daily chart, ascending wedge

After today’s BoE hearing, the next key fundamental risk for the British Pound is from the monthly manufacturing and industrial production data due for release tomorrow, with expectations of a modest pickup of 0.20% and 0.60% on a month over month basis, respectively.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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