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UK Economic Fundamentals Mixed but Brexit Fears Rising

The United Kingdom was able to recover from the 2009 crisis at a fast pace in the last three years. At one point the pace of growth was strong enough for markets to anticipate the first rate hike from a major central bank would come from the Bank of England (BoE). A change in leadership at the “Old Lady” coincided with a slowdown in growth. Chief economist Andy Haldane was one of the first to signal rates would be on hold if economic conditions continued to weaken, not only in the U.K. but abroad. The drop in commodity prices has increased deflation pressures that even though Governor Mark Carney has called temporary continue to keep inflation low. The surge in energy prices has given some optimism to inflation as the Organization of the Petroleum Exporting Countries (OPEC) and Russia have stabilized the market with a oil output freeze meeting in April.

The biggest risk to the U.K. economy as outlined by the BoE is the upcoming Brexit referendum in June. Surveys rank both sides as too close to call which have depreciated the pound. The central bank has assured markets that it will provide liquidity in order to preserve financial stability and has drawn contingency plans if the “Leave” vote prevails. BoE Governor has been criticized for having a “Stay” bias, but that view is in line with preserving stability.

The Bank of England (BoE) will release the monetary policy summary, the official bank rate and the MPC votes on Thursday, March 17 4 at 8:00 am EDT. The benchmark rate is anticipated to stay unchanged at 0.50 percent with a unanimous vote after the lone dissenter, policymaker Ian McCafferty, rejoined the fold in February.

Prior to the U.S. Federal Reserve dovish March FOMC statement the GBP had been on a downward trend versus the USD. Brexit fears had put the pair close to breaking under the 1.40 price level. Fed Chair Yellen’s comments following the decision to hold rates by the U.S. central bank pushed the pound higher. The GBP/USD is trading at 1.4250 making back some of the losses in the week, but still net negative ahead of the Bank of England monetary policy summary.

BOE to Hold in March but Next Rate Change Will be Upwards

The U.K. economy accelerated in 2014 to the point it was at one time the leading candidate for the central bank to raise interests rates ahed of the U.S. Federal Reserve. The drop in commodity prices and lower exports as well as the election cycle put the Bank of England (BoE) on hold for the entirety of 2015. The BoE governor Canadian Mark Carney remains optimistic about growth and by his assessment the negative factors are temporary. The rest of the team at the BoE has been supportive and have issued statements that see the next rate move being a hike. The timing has not been discussed but the markets are not expecting it to happen in 2016 and in some analysts’s view even 2017 might be out of the picture.

Brexit anxiety has been rising as the June 23 Referendum date nears. Given the political and social nature of the vote the outcome is uncertain and the volatility in the market reflects that as various polls have not ruled out either outcome. The GBP has been weaker as a result as investors are unsure on what the final vote will bring.

Bank of England Governor Mark Carney has a tough act to follow. After his colleagues at the European Central Bank (ECB) and the U.S. Federal Reserve have delivered market moving statements. The ECB opted for bold action but somewhat soft rhetoric at the press conference and the Fed was dovish all the way through. The BoE of England is expected to offer a more neutral tone as economic indicators are mixed and as the Fed has shown, with other central banks easing in full force, standing pat is tightening. The monetary policy divergence might not be a wide, but the gap remains as some economies have more momentum than others.

GBP events to watch this week:

Thursday, March 17
4:30 am CHF Libor Rate
4:30 am CHF SNB Monetary Policy Assessment
8:00 am GBP MPC Official Bank Rate Votes
8:00 am GBP Monetary Policy Summary
8:00 am GBP Official Bank Rate
8:30 am USD Philly Fed Manufacturing Index
8:30 am USD Unemployment Claims

*All times EDT

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