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FxWirePro: BoE banks on Brexit deadlock, can it be most likely status quo monetary policy?

The Bank of England will provide its first policy decision and Inflation Report for the year in a short while. That will be followed by BoE Governor Carney’s first press conference of 2019.

The market’s expectations for UK interest rate hikes have already been pared back in response to recent weaker UK and international economic data. Consequently, while the BoE will likely acknowledge increased ‘headwinds’ to economic growth it will probably want to avoid endorsing an even more ‘dovish’ path for rates. Most of the GBP crosses have been edgy ahead of this event with mounting volatilities.

There have been certain circumstances that the Bank of England (BoE) has to implement responsible monetary policy. Not an easy job, as depending on the exit scenario considerable economic and monetary disruptions would require very different reactions. As a result, the British central bank will leave everything on hold this week and will probably refer back to its previous statements: that there will be no automatic reaction to a possible no deal Brexit, but that the key rate can move in different directions. In November the BoE had already described the different reaction functions that are unlikely to have changed, as the decision-makers in London have been treading water since then as far as the Brexit process is concerned: 

1) In case of a no deal Brexit rate hikes are not foreseeable initially due to the possible economic consequences, instead, we may even see rate cuts even if inflation does overshoot the target. 

2) Unless of course, a collapse of Sterling in case of a disorderly Brexit has to be prevented. In that case, the BoE could even hike its key rate. The same could happen were we to see a massive supply shock and a dramatic rise in inflation. The BoE might possibly have changed its mind on this issue since November as the risk of a no deal Brexit has risen since the autumn and by now the BoE might generally trend more towards rate cuts in case of a hard Brexit. 

3) If an amicable agreement is reached the BoE expects demand to rise. That, in turn, would suggest that in this case the key rate could be hiked more quickly than currently assumed, as wages have been rising significantly since September with the unemployment rate falling to 4%, which could increase inflation pressure. In case of a soft Brexit, we would therefore probably see a rate hike before year-end. More detailed information on this issue is likely to emerge in the BoE’s inflation report due for publication today. 

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing -48 (which is bearish) while articulating (at 10:31 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

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