BoE Fallout: Brexit Would Mean Recession:
In yesterday’s Cable Brexit Risk Decision blog, we spoke about the possibility of the Bank of England highlighting the economic impacts of a potential Brexit and the risk being skewed to the downside on Cable as a result.
Speaking at the scheduled news conference following the bank’s interest rate decision, Carney didn’t hold back his opinion on the risks that the British economy would face if the nation votes to leave the European Union, even bringing up the prospect of the country sliding into ‘technical recession’! (GDP shrinking for two quarters in a row).
“Could possibly include a technical recession.”
The BoE also went into great detail on their risk assessment and a Brexit’s implications on monetary policy heading forward.
“A vote to leave the EU could have material economic effects – on the exchange rate, on demand and on the economy’s supply potential – that could affect the appropriate setting of monetary policy.”
Yes rates were left on hold as expected, but for the BoE to get involved as deep as they have in the middle of a referendum campaign shows that for them, the “most immediate and significant risk” outlook is no longer a game. Reality is starting to bite.
— Vantage FX (@VantageFX) May 12, 2016
Check the Daily and 4 Hour GBP/USD charts published on yesterday’s BoE Preview blog via the Tweets above, but to be honest I’m a little surprised at how markets priced last night’s move in the short term.
Price has retraced the move at the time of writing, but I really would have expected further downside after that press conference. Well heck, any downside at all!
What that tells us is that markets are still trusting the polls with a ‘stay’ vote still clearly in the lead. But it also tells us that all the risks highlighted above by the BoE are nowhere near priced in.
It’s very obvious in which direction the major risk lies on any hint of tightening in the referendum race. This is where your trading opportunity lies heading forward.
Chart of the Day:
One other major story overnight that will potentially have an effect on Forex markets heading forward is the raft of both Australian and international banks revising their interest rate forecasts for 2016 to include further cuts.
With the RBA’s inflation outlook slashed following last quarters dire CPI number, the retail banks are dropping their forecasts one by one. The latest being the Commonwealth Bank:
— Dane Williams (@danewilliamsau) May 12, 2016
In keeping with the GBP theme, we take a look at the GBP/AUD daily chart as today’s chart of the day.
That latest daily candle highlights the lack of reaction from GBP following Carney’s comments, at the same time showing just how weak the Aussie is as the re-pricing hits top gear.
The currency cross is approaching a major confluence of resistance from the 61.8% fib of the latest leg down, as well as the most obvious daily trend line.
Add the 2.0000 psychological level which price has reacted off in both directions to the mix just above and we have a great ‘in play’ chart to trade.
On the Calendar Friday:
NZD Retail Sales q/q (0.8% v 1.0% expected)
USD Core Retail Sales m/m
USD PPI m/m
USD Retail Sales m/m
USD Prelim UoM Consumer Sentiment
On the Calendar Saturday:
CNY Industrial Production y/y
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