Q4 Provoked BOE Easing Expectations

Over the course of Q4 BOE easing expectations had begun increasing once again. With the return of nationwide lockdowns and the virus soaring to record levels, both in terms of new infections and daily deaths, the market was turning bearish on GBP. The added stress of the uncertainty around Brexit trade talks was also hampering the outlook. Over this time, BOE commentary was becoming increasingly dovish and the issue of negative rates was starting to be discussed in greater detail.

BOE Easing Had Been Projected for Q1

With this in mind, traders had been looking at Q1 as likely to yield further easing from the BOE. With lockdowns continuing over Q1 sand projected to run deep into March, economic uncertainty remains high. However, there has been a slight, but important shift in the outlook.

Outlook Has Improved Recently

The government's lockdown measures and vaccine rollout have both been a firm success. infection rates and daily deaths have both been dropping steadily over recent weeks. Additionally, the government is on course with its vaccination targets and remains confident that it can sustain the current pace and deliver on its goal.

Mid-Year Rebound Forecast

This suggests that the prospects of a mid year rebound are highly likely. Lockdown measures are likely to be eased some time in March and then continue to be eased on a layered basis, allowing for the economy to recover. With current projections suggesting all adults will be vaccinated by August, the prospects of a sharp and firm rebound over H2 look robust.

Easing Expectations Reduced

Given the improvement in the outlook, the prospect of negative rates being introduced at this stage has weakened. However, there are still plenty of downside risks and a great deal of uncertainty. Fears over mutant strains of the virus and the impact they will have on vaccine efficacy rates are one source of concern. The vaccine supply disruptions which have reared their head sporadically are another.

BOE To Sound Cautiously Optimistic

In light of the better prospects but also the continued downside risks, the BOE seems likely to remain on hold this week. The message is likely to be a balanced one, acknowledging the better outlook but also warning of the remaining risks and uncertainty which mean that further easing will not be taken off the table and the prospect of negative rates could also be kept alive.

Technical Views

GBPUSD

GBPUSD continues to hold within the tight block of consolidation which has formed beneath the 1.3747 resistance level which continues to hold. Price remains within the large bullish channel which has framed the rally off 2020 lows and while above 1.3516, the near term view is bullish. A break of this level and the channel low would turn attention to the 1.3191 level next.

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