The Bank of England joined its dovish counterparts on Thursday after leaving interest rates steady as expected amid mounting fears that Brexit coinciding with a global economic slowdown could further sink British markets. Of more importance, policymakers surprisingly decided to cut growth forecasts to 1.2% for 2019 which is the lowest since financial crisis, turning the spotlight to Monday’s preliminary GDP figures for the fourth quarter, with markets predicting a weaker start for the year.
At 0930 GMT, the Office for National Statistics is projected to say that GDP growth in the fourth quarter eased to 0.3% q/q after jumping to a more-than-a-year high of 0.6% in Q3, marking a yearly expansion of 1.4% compared to 1.5% before. The data will follow discouraging PMI surveys for the manufacturing, construction and services sectors, all of which showed that risk aversion among companies has risen in January as the UK could crash out of the EU without arranging its future relations with the bloc and hence safeguarding their supply chains. Consumers are also in a wait-and-see mode despite the rise in wages and the four-decade low unemployment rate as they probably anticipate more bad times ahead as well, with core retail sales contracting sharply in December.
The slowing business activities and the cautious households indicate that things could get worse before getting better. With eight weeks left before the Brexit date on March 29, there is not much time for Theresa May to renegotiate the sticking point of the Irish border point and markets have already started to seriously believe in a hard Brexit, which will introduce new EU tariffs on UK exports, disrupting trade flows and hence economic growth not only in the UK but also in the EU. The BoE chief Mark Carney acknowledged on Thursday that GDP growth could decelerate even under a soft Brexit as the outlook for the global economy is not rosy either, while chances for a recession in the homeland have risen to 25% when considering a no-deal, no transitional period withdrawal from the union. Moreover, while plans for further rate hikes are off the table now and plans for a rate cut are not seen on the horizon either as inflation is still above the BoE’s 2.0% target, Carney will likely monitor political developments to determine the path of monetary policy.
Turning to FX markets, GBPUSD managed to quickly recover on Thursday despite the BoE’s unexpected growth downgrade as investors wait for more Brexit clarity. A worse-than-expected GDP growth figure on Monday though, could see the sell-off resume on speculation that consequences of the Brexit uncertainty may appear more violent than analysts think. In this case GBPUSD could drop straight down to 1.29. Another leg lower, may find support around 1.2830, while deeper, support could run to 1.2780.
Alternatively, an upside surprise in the data could bring some buying interest into the market, though not for long as the numbers could do little to ease worries over a disorganized exit from the EU. GBPUSD may retest the 1.30 key level, where any successful break would shift attention up to the 1.3050-1.3100 area.
Note that industrial production and trade balance for December will be published separately at the same time. Factory output is anticipated to increase by 0.2% m/m after November’s 0.4% decline, while trade deficit is expected to turn slightly down to 12 billion pounds
