GBP loosening as election uncertainties increase

Vincent Mivelaz Swissquote Bank Ltd

Although it should stay in the background looking forward, the Bank of England monetary policy meeting already provided solid arguments that rate cuts could be explored in 2020 as the central bank is becoming more and more dovish in the midst of headwinds from both Brexit, the global economy and not to mention the growing dissent of its board members. Even if general election polls continue to confirm the lead of the Tories with a 10% advance, despite insensitive comments from Conservative party MP Jacob Rees-Mogg, it appears that sterling appreciation potential should be restrained in the event of worsening economic conditions, albeit positive Brexit outcome.

Six months after elections of EU Parliament members, the United Kingdom is set for intense electoral debates against the backdrop of Brexit, a lasting obstacle for the BoE whose long-standing hawkish stance seems to be eroding. Considering that close to 30% or two out of nine officials were willing to reduce the 0.75% Bank Rate, unchanged in 15 months, in order to limit downside risks to growth and that other MPC members seem open to that possibility, the focus of attention is expected to turn towards 1Q GDP growth and whether it matches the BoE outlook. The BoE now expects the British economy to grow by 1% in 2019, up from 1.3% in August and 1.50% in May, and by 1.60% in 2020, up from 1.30% in August, in a baseline scenario where both the slowdown in global growth and Brexit uncertainty would significantly reduce. Yet that remains to be seen, as uncertainties on the Brexit side following a potential Brexit deal ratification would face additional impediments due to the transition period coming thereafter and which would require a deeper, practical discussion on the definitive EU – UK relationship, with an initial deadline set for 31 December 2020. In these circumstances, we see little upside potential for GBP above March 2019 range for now as election poll deadlines should remain dominant.

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Author

Vincent Mivelaz

Swissquote Bank Ltd

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