BOE Sounding Dovish
UK asset prices received a boost late in the week as Michael Saunders of the Bank of England’s Monetary Policy Committee warned that the BOE could be forced to cut rates following Brexit, pushing GBP lower. Speaking during a conference, Saunders said: “If the UK avoids a no-deal Brexit, monetary policy also could go either way and I think it is quite plausible that the next move in Bank Rate would be down rather than up.
One scenario is that Brexit uncertainty falls significantly and global growth recovers a bit... In this case, some further monetary tightening (limited and gradual) is likely to be needed over time.
Another scenario, and this is perhaps more likely to me, is of prolonged high Brexit uncertainty (even without a no-deal Brexit actually occurring). In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing.”
Expanding further on his gloomy warning, Saunders said “There is extensive evidence that high uncertainty with downside risks is bad for economic growth. The key point is that for households and businesses, many major decisions (eg on investment, house purchase, hiring, R&D) are costly to reverse. Hence, when uncertainty – and especially the scale of downside risks – is high, there is a clear incentive to defer such major decisions until the situation is clearer”
Saunders’ warning marks a distinct shift in thinking among BOE members and has spooked the market, which now senses a dovish shift. Earlier in the year, we heard the BOE warning the markets over the two-way risks from Brexit i.e. that a rate cut might be needed should a no-deal Brexit happen, whereas a rate hike would likely be needed should the UK secure a deal. However, Saunders is now saying that given the extended period of uncertainty (and the chance that Brexit is prolonged even further) even with a deal, the BOE might need to cut interest rates to backstop the economy.
Furthermore, we are now for the first time hearing the BOE speak about potentially acting ahead of a Brexit decision. For instance, if Article 50 is extended once again, the ensuing period of uncertainty could create conditions which would warrant a rate cut.
Latest on Brexit
The UK Brexit Secretary Stephen Barclay is travelling to Brussels today for meetings with EU leaders. Michael Barnier, the EU’s chief negotiator said yesterday that the current alternative to the Irish backstop proposed by the UK was unworkable. Barclay and Barnier are now set for further discussions around potential backstop alternatives, which continue to be the biggest challenge to striking a deal over Brexit.
Speaking with EU leaders ahead of the talks with the UK, Barnier said that the UK was simply “picking and choosing” from EU laws while none of its ideas were fully conceived. These comments echo the view of many EU leaders that the UK and the EU will be unable to agree a deal ahead of the next EU summit on October 17th.
UK MP’s recently passed legislation which means that if parliament is unable to agree a deal, or support a no-deal exit, by October 19th, the PM must request an extension from the EU which would postpone the Brexit date once again. With distinct divisions between the EU and the UK remaining over the Irish backstop the chances of a deal with the EU appear slim.
Technical & Trade Views
FTSE (Bullish above 7300, targeting above 7600)
FTSE From a technical and trading perspective. Price is trending higher now with VWAP supporting a test of offers into the 7577 yearly R1 level. My bias is for an eventual break and I will be monitoring price action if we move above the yearly R1 for long setups targeting beyond 7600.
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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!