BOE Leaves Rates Unchanged
The Bank of England left its monetary policy levels unchanged at its August MPC meeting yesterday along with a message that the downturn is likely to be less severe than initially thought. However, the BOE was clear that the downturn in the UK was worse than the downturn seen in rival economies. The UK unemployment situation is particularly worrying for the bank, which forecasts unemployment to peak at around 7.5% by year end, which would roughly translate into 2.5 million unemployed people.
Unemployment To Peak at 7.5% in 2020
Commenting on the employment landscape the bank said: “The unemployment rate is expected to peak at around 7½% in Q4, based on survey evidence, high-frequency indicators, and the historical relationship between unemployment and output.
This projection takes into account the expected sectoral pattern of output and, in particular, that the initial recovery in output is likely to be slower in more labour-intensive areas of the economy.
The forecast is consistent with most furloughed workers returning to work by the end of the year. The number of people in employment is expected to fall by more than 3% in the second half of the year, however.”
Considering Negative Rates
In a further dovish message, the BOE said it was currently in discussion regarding the prospect of employing negative interest rates, saying: “The MPC is currently considering whether the ELB for Bank Rate could be below zero; that is whether a negative policy rate could provide economic stimulus.
The effectiveness of a negative policy rate will depend, in part, on the structure of the financial system and how the policy transmits through banks to the interest rates facing households and companies. It will also depend on the financial and economic conditions at the time.
The MPC will continue to keep under review the appropriateness of a negative policy rate alongside all of its policy tools. “
Looking ahead, the BOE forecasts that inflation will fall to 0% this year after falling to 0.6% in Q2. The BOE warned that “Lower energy prices continue to weigh on inflation over coming months. In addition, the Government’s announced cut to VAT will act as a drag on inflation over the second half of the year.”
In all the bank’s message has done little to suggest that the UK economy is likely to recover ahead of schedule. While the downturn has not been as severe as first thought, the drag on employment and inflation will take a long time to resolve and the downside risks from the potential for further lockdowns means that the outlook is highly dependent on the path of the pandemic.
Technical Views
GBPUSD (Bullish above 1.3191)
From a technical perspective. GBPUSD continues to rally within the bullish channel which has framed the recovery. Price has now broken above the long-term bearish trend line and is currently challenging the 1.3191 resistance which, if broken, will turn attention to the 1.3516 level next. To the downside, the main support area to watch is the 1.2649 area where we have confluence between the rising channel low, structural support and the 50dma.
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