December 14, 2017

Central Banks: Potential for New Lows in GBP/USD

One of the major questions facing the Bank of England is whether there is a bubble in the UK debt market. The new Deputy Governor for Markets and Banking Charlotte Hogg says there is not one. She said, “I don’t see evidence that we have a bubble at the moment, nor do I see evidence that it’s burst. What I see is a reasonably functioning and effective Gilts market (Independent UK).”

Untimately, more stimulus will likely put pressure on the GBP/USD, and forex traders that are new to this pair should begin with an FX simulator that can be used to trade under live market conditions with no actual monetary risk.

Hogg maintains that QE has been successful for output and employment. A concern facing the BOW is that their bond buying over the past 8 years has led to a decline in yields. Hogg, however, believes this is due to other factors like demographic shifts.

Brexit Aftermath in Currency Markets

Hogg continued to say Brexit is the biggest problem facing the BOE right now. She thinks Brexit could lead to a much steeper decline in consumer spending than the BOE has projected. She added that UK households were beginning to feel pressure as a result of the 18% depreciation in the pound sterling since November 2015.

Specifically she said, “The MPC’s current forecast assumes steadily slowing growth in consumption, facilitated by a continued fall in the savings rate. But I can envisage scenarios in which the reaction of consumption could be more sudden.” Currently, the BOE is projecting inflation will be over 2% as the sterling continues to drop in response to Brexit. In February UK sentiment fell along with the urge for major purchases (Bloomberg).

UK Economic Data

Some other updates from February out of the BOE are the economy grew by 2.2% in 2016 as opposed to the reported 2%. The BOE is currently projecting 2% growth in 2017, 1.6% in 2018, and 2.6% in 2019. In November these projections were 1.8% (2017), 2.8% (2018), and 2.6% (2019).

The current projection on inflation is 2.7% in 2018 and 2.6% in early 2019. In November this projection was 2.8% (2018) and 2.6% (2019). With regards to unemployment, the BOE is projecting 5% in 2018 and 5% in early 2019. The compares to their projections of 5.5% (2018) and 5.6% (2019). As you can see, the BOE has become rather bullish on their projections for the economy as a whole, but certain unknown factors loom as possible effects.

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