Flash Notes

The Bank of England (BoE) kicked off 2015 by keeping its benchmark interest rate at 0.5%, deciding also to maintain the size of its bond-buying stimulus programme at GBP375bln. The minutes of the January monetary policy meeting will be published on 21 January.

    There was no surprise in the central bank’s decision given the low inflation backdrop and concerns about the economic recovery. Consumer price inflation fell to a 12-year low of 1.0% in November and is expected to fall further along with the price of oil. And official figures last month showed that economic recovery during 2014 had been slower than previously thought, with GDP in the third quarter 2.6% ahead on the same period in 2013, down from an earlier estimate of 3.0%.Besides, there are increasing concerns about the Eurozone, where inflation this week turned negative.

    In light of these factors, expectations for the first BoE rate hike have also been measurably pushed back. This explains in part why GBP has been the biggest loser against the USD as far as G10 currencies are concerned in the short year-to-date.Currently, the GBP/USD pair is seen trading just shy of the 1.500-figure. Although the latest decline looks stretched, we are not ruling out further declines given the bearish momentum as well as the material shift in relative yields. We have recently revised lower our GBP/USD forecasts, looking for end-1Q and end -2Q targets of 1.50 and 1.48 respectively.

    From a technical perspective, the break of the monthly trend-line connecting 1.3500 (low in Jan 2009) and 1.4814 (low in Jul 2013) is a significant development. The whole move from 1.3500 to 1.7192 appears to be part of a protracted consolidation phase and the break of the support trend-line could signal the start of a fresh long-term bearish phase. The next support is at the 2013 low of 1.4814 followed by the 2010 low of 1.4228. While the key long-term resistance is at 1.6180, last Friday’s high of 1.5590 is already very strong resistance and as long this level is not taken out on a monthly close basis (note that since the 1.7192 high, each successive monthly high has been lower than the previous month), the outlook for GBP appears bleak going into 2015.

    Upcoming UK data would be crucial. Later today, we will be receiving reports on trade, manufacturing production and construction output on Friday. Next week, market participants will keenly eye CPI data to gain further insights into the timing of an interest rate rise in the UK.