Jane Foley, senior FX strategist at Rabobank, points out that dovish undertones in this morning’s speech from BoE Governor Carney has knocked GBP/USD back to its lowest levels since December 27.
“Carney raised the prospect that the Bank’s most recent economic projections may have been too optimistic. He makes note of the fact that the pace of growth in the UK has slowed to below potential and that the MPC had been expecting this to reverse. Carney suggests that “this rebound is not, of course, assured”.”
“The takeaway is that the MPC could be more inclined to ease policy further. These policy risks are likely to be accentuated if political uncertainty builds again in the UK. Despite PM Johnson’s hopes that a complete UK/EU trade deal can be signed in the coming months, the rhetoric coming from over the Channel suggests that the time frame could prove to be too short. On the back of both economic and political risks in the UK we expect GBP/USD to be trading below the 1.30 level on a 3 to 6 month view.”
“With the exception of a few days around Christmas, GBP/USD has held above 1.30 since the election and the consensus of Bloomberg’s FX survey points to cable remaining above this level throughout 2020. We see this optimism as leaving GBP investors open to disappointment. In her visit to the UK yesterday, EU Commission President Von Der Leyen stated that it is “basically impossible” to negotiate a close relationship by the end of the year. This reiterates the view of other EU leaders made after last month’s summit.”
“Looking ahead to next week the market will see fresh official UK data readings for industrial production, construction, monthly Nov GDP and CPI inflation. These will help solidify the market’s view about the risk of further BoE rate cuts (we expect 2 more 25 bps moves from the MPC this year). That said, the impact of the UK economic data could well be overwhelmed by Brexit related news in the months ahead. This is a particular risk if a less than amicable start to the UK/EU future arrangement talks raises the risk of a cliff edge at the end of the year.”