GBP remains near 2-year lows as BoE tread cautious path

Summary:

• BOE vote unanimously to keep rates unchanged 

• No major announcements in press conference

• GBPUSD remains close to post-referendum lows

There were no surprises in the latest policy decision from the Bank of England with the MPC voting unanimously to keep the base rate unchanged at 0.75%. The Bank stated that it continues to assume a smooth Brexit scenario and in such an outcome it would mean gradual rate hikes. The growth forecasts for the next couple of years have been revised lower while the corresponding inflation predictions are now higher than at their last release. The statement outlined that these detailed projections do not include the possibility of a no-deal Brexit which given the recent political events greatly reduces their relevance and importance. 

Latest forecasts:

GDP:

2019: 1.3% vs 1.5% prior

2020: 1.3% vs 1.6% prior 

2021: 2.3% vs 2.1% prior

Inflation:

2019: 1.9% vs 1.72% prior

2020: 2.23% vs 2.05% prior

2021: 2.37% vs 2.16% prior

During the press conference Governor Carney reiterated that a deal is still the most probable outcome while also adding that the Bank’s policy response to both a deal and no-deal scenario is not on a preset course. One of the highlights of the Q&A session was when asked if the Government is right to assume a large monetary stimulus would occur in the event of a no deal Brexit Carney responded that it depends.  

Having been previously heavily criticised for overstating the risks of a no-deal Brexit Governor Carney was especially cautious with his responses, to the extent that there was very little of note in the press conference as far as the markets are concerned. The pound continues to languish near its lowest level in a couple years and will likely remain under pressure for the foreseeable future.  

GBPUSD has made a new low for the week today that was less than 100 pips above the post referendum lows of 1.1988. Source: xStation    

UK manufacturing fails to buck downtrend

The latest look at British manufacturing has served to further reaffirm the notion that the sector is struggling with factory activity stuck at a six-and-a-half year low. A PMI print for July of 48.0 is the 3rd consecutive print in contractionary territory and shows that the global slowdown in manufacturing is taking its toll. Perversely the rising threat of a no deal could see this indicator recover in the coming months with firm’s looking to stockpile inventory creating a short-term improvement, similar to the one we saw in the first quarter of the year when the Brexit deadline was 31st March.   

Manufacturing PMI has taken a sharp turn for the worse of late in the UK and is near its lowest level in 7 years. Source: XTB Macrobond