Orbex Market Flash

BOE Cuts Growth Forecasts Sharply On Brexit Fears

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The first BOE meeting of the year was a decidedly dovish affair with the BOE keeping rates on hold, as expected. It did, however, sharply revise growth lower amidst ongoing Brexit uncertainty.

In one of the largest revisions to short-term growth forecasts since the June 2016 Brexit referendum, the BOE revised down its 2019 forecast to just 1.2% from the prior 1.7% forecast at the bank’s last “Super Thursday” meeting in November.

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The main reason for this downward revision is, of course, Brexit. The BOE chief, Mark Carney, explained that the economic outlook had worsened in light of elevated uncertainty around the fractious Brexit negotiations.

He stated that in the event of a “no deal” Brexit, the risk of a recession would rise greatly. Carney affirmed:

“When the economy is growing more slowly, the probability of having a negative quarter or two goes up… and if there is a shock – a no-deal, no-transition Brexit would be a shock – that further increases the possibility of negative quarters”.

However, Carney kept the message balanced, pointing to robustness in the labor market and outlining the bank’s intention to pursue higher interest rates if a Brexit deal is done. In this regard, although some of the specifics were more negative at face value, the BOE’s message is the same; if a Brexit deal is reached, it intends to continue hiking rates.

Market Reaction & Technical Perspective

Despite the immediate sell-off in response to the downgrade growth forecasts, GBP recovered quickly on the day as details from the press conference filtered through to the market. The BOE maintains that rate rises will be necessary again, keeping bulls optimistic that May can deliver a deal.

gbpusd

The sell-off in GBPUSD took price back down to retest the broken bearish trend line running from Q3 2018 which, for now, is holding as support. If price can make it back above the 1.3004 level, focus will be on further upside. However, while price holds below this level the consolidation is likely to drift further, though support at 1.2693 should keep price underpinned.

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