No Change Expected From Bank Of England
Policymakers at the Bank of England convene tomorrow for the December rate-setting meeting and, following dovish guidance at the last meeting, Sterling is trading lower as investors remain wary of dovish risks.
Last time around, we saw two BOE members voting in favour of a cut, the fist time this has occurred since the post-Brexit referendum rate adjustment. However, at the time of the meeting, US-Sino trade-war risks remained elevated and the UK general elections had not yet taken place.
Since that meeting, the US and China have agreed the phase-one trade deal, due to be signed imminently following a legal review. Furthermore, with the UK elections seeing PM Johnson’s Conservative party gaining a parliamentary majority, Brexit risks have now been reduced.
With the outlook for world growth likely to be revised higher in coming months as a result of the US-Sino trade agreement, and with the UK likely to leave the EU with a trade deal by January 31st, there is likely scope for the Bank of England to maintain its policy rates at current levels.
Nonetheless, recent data has continued to disappoint and with manufacturing moving deeper into negative territory, the message from Mark Carney is likely to still be one of caution and concern. While the outcome of the UK elections has removed the immediate risks around Brexit, there are some deferred risks which will come back into focus into the middle of next year.
Johnson has confirmed that the UK’s transition period with the UK will cease, for definite, on December 31st 2020. The UK PM has announced that he will add a clause to the Withdrawal Agreement Bill this week which will block the December 31st 2020 deadline for the transition phase from being extended. In effect, this means that the UK will depart the customs union on that date even if a future trade deal has not been agreed with the EU.
Many critics of the PM’s announcement point out that, as Brexit negotiations took so long up to this point, the chances of the two sides agreeing a trade deal in this timeframe, are slim at best. Given the timeframe, only a very basic deal is likely to be done, such as a zero-tariffs, zero-quotas deal though this would require the UK agreeing to conditions set by the EU which will likely try to retain some say over social and economic policy. Consequently, the risks of the two sides failing to agree a trade deal, are elevated.
This development will be frustrating for many businesses and investors alike as it means that Brexit risks have not been totally quashed. Even if the UK leaves the EU on January 31st as per the terms of the Withdrawal Agreement, the UK could still exit the single market without any trade terms, meaning that economic remain. The Bank of England will likely reference these risks at the meeting this week, informing the decision to keep rates unchanged at this point.
Technical View
GBPCHF (Neutral, bearish below 1.2579)
From a technical view-point GBPCHF is showing signs of capitulation here. The volume spike into recent highs followed by an inside candle and subsequent break-down, raises risks of a further correction lower. Longer-term VWAP remain positive so we could see buying kick in as we test the monthly S1 at 1.2759, with the supporting trend line just below. A breach here would be a bearish development.
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Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!