Fundamental Forecast for GBP:Â Neutral
- Sterling Breaks Lower on BoE’s Falling Forecasts, Gold Price Extends.
- GBP/USD Technical Analysis: BoE Brings on Fibonacci Support Test.
- If you’re looking for trading ideas or education, check out our Trading Guides. And if you’re looking for trade ideas that are more short-term in nature, please check out our IG Client Sentiment.
The big item from this week for the British Pound was the Bank of England’s rate decision on Thursday. This was a quarterly meeting, often referred to as ‘Super Thursday’ as the BoE accompanied the rate decision with a set of updated forecasts as well as meeting minutes and a press conference after the decision. It was probably no surprise to many that BoE Governor Mark Carney remained dovish, as has become usual in the post-Brexit backdrop.
But Thursday’s meeting wasn’t so cut and dry: While Mr. Carney did remain dovish and rather pessimistic for the economy’s prospects around Brexit, the BoE did indicate that rate hikes may be on the horizon. Within the meeting minutes, the BoE said: “If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying August projections’.
This doesn’t sound overtly-dovish: Instead, it sounds like a Central Bank that’s preparing to hike rates in an effort to ward off inflation if price increases continue above the BoE’s forecasted levels. As Mr. Carney had shared, the type of inflation currently being seen in the U.K. isn’t the type of inflation that Central Banks have been looking for since the Global Financial Collapse. The inflation being seen currently is largely noticeable in asset prices, and imports – meaning that British consumers are paying more, but incomes aren’t rising as fast to keep up with these elevated prices. So far in 2017, consumer credit levels have shot-higher to offset this differential, but this isn’t really an affable long-term solution that should get economists excited about forward-looking growth prospects. In turn, the BoE downgraded GDP growth estimates for the next two years, now looking for 1.7% growth in 2017 (from a previous 1.9%) and 1.6% growth in 2018 (from a previous 1.7%).
