Carney Crushes May Rate Hike Hopes
GBP has been under heavy selling pressure over the last two weeks following comments from BOE governor Mark Carney who surprised the market by unexpectedly dashing hopes of a May rate hike. During comments made as part of an interview with a UK broadcaster, intended for a non-market audience, the BOE chief said that due to recent UK data weakness, a May rate hike was in doubt.
Prior to these comments, the market had been largely expecting a May rate hike, reflected by a spate of consistent GBP buying among institutional investors, which saw GBP surging to fresh highs on the year. However, in the wake of these comments GBP has since retreated and sold off sharply, moving back down to the March low.
GBP Rises Just 0.1% in Q1
Following these comments, GBP bulls received further bad news as the latest GDP print came in much weaker than expected for the last quarter printing just 0.1%, against an expected 0.3% and down from 0.4% in the prior quarter. The reading took markets heavily by surprise and was so low that it even came in below the lowest estimate among those polled by Bloomberg ahead of the release.
Adding even further pain to the release, the Office of National Statistics reported that not much of the weakness was down to temporary factors and that recent bad weather had only made a minor impact. The majority of the weakness was shown in one sector: construction. Output in the sector, which is worth around 6% of GDP, fell 3.3% over the quarter, taking 0.2% of the GDP reading alone.
Some GDP Positives Noted
It is worth noting however that there were some positive readings. Industrial production grew 0.7% in the quarter and marks 18 months of no declines, which can be viewed as a result of the strong uptick in global growth. At over 80% of total output, the most important sector in the economy is services and though 0.3% growth quarter on quarter isn’t remarkably strong, nor is it excessively weak and so this reading can be seen as a positive also.
Clearly, this reading has been taken by the market as a sign that the BOE will not be hiking rates in May, as shown by the sell off which has now been further extended. However, the BOE has previously warned against attaching too much importance to the initial release of GDP. Due to the fact that the data is only released a month after the quarter end, the ONS can only use around 40% of the inputs that will make up the final GDP reading.
However, in the context of recent data weakness and especially in the context of Carney’s comments, this weak reading has all but confirmed that the BOE will hold rates in May. Indeed, market pricing for a May hike fell from around 55% ahead of the release to just 25% shortly after. While Carney did add the caveat that there are still further data releases to come ahead of the meeting, there are no readings scheduled that cold be strong enough to put a rate hike back on the table.
Rate Rise Later In The Year Still On The Table
During Carney’s comments, he was keen to stress that if the bank doesn’t raise rates in May, this does not preclude it raising rates further down the line. So, while GBP is clearly under pressure now as investors pair back the long exposure that was building ahead of the meeting, this retracement can be viewed as an opportunity for longer term players and we will likely see dip buying kicking in. However, incoming data will be of prime importance now and any further data weakness over the coming months could fuel a more dramatic sell off as the market slashes its BOE 2018 rate hike expectations.
With a double top in play around the 1.4343 level, GBPUSD has broken down below the rising channel and is now approaching key technical support at the 50% retracement from the September 2017 lows to 2018 highs where the March 2018 low also sits. This is a key level and if price finds support here we will likely see a rotation higher as GBP settles into a range. A break of this level however, opens the way for a run down to deeper support.