Hedged BoE forecasts buoy sterling

The BoE sounded the alarm till Mark Carney’s press conference

Deeper dip

The Bank of England may just have rolled out the closest comments we will see to a self-parody of ‘Project Fear’, but the stance lasted only until Governor Mark Carney began speaking in person. Even beforehand, forecast cuts deepened the trajectory of policymakers’ economic expectations from November, but not radically. Damage is expected to be at its worst this year. Half a percentage point was excised from the prior GDP forecast of 1.7%. 2020’s was cut by two tenths, leaving 1.5%. Then a rebound is expected to 1.9% in 2021. The dip for the current quarter is expected to be modest; to 0.2% from 0.3% foreseen at the end of last year.

Brexit “path” intact

The mini-Zeitgeist calls for (over)dramatic language though, and there was enough in the policy statement. “Intensified” uncertainty weighs on investment and consumer-led growth, whilst tighter global financial conditions and negative trade sentiment “contributed to a faster deceleration in activity”. Carney offered more temperate counterpoints in person. For one thing, a sensible-looking EU-UK deal is still the likeliest outcome expected after more angst. “Our core central expectation is that we will have higher uncertainty and there will be a path to some sort of arrangement." In that event, dire forecasts should fall to the wayside, as a “more rapid decline in uncertainties…could boost annual GDP. Even then, “The core of the financial system is ready for whatever form Brexit takes ”, the governor noted.

Complacent vs. wary

Consequently, sterling is undergoing one of its frequent dramatic reversals. Cable’s Thursday range has spanned $1.2852 to just five pips shy of $1.30 with signs that the short bias that was creeping back faces an unexpectedly swift squeeze. In a nutshell, rumours of the market’s less relaxed mood look a little exaggerated, post-BOE. To be clear, sentiment shifts are distinct from deeper cracks in entrenched positioning. Tougher sterling conditions for buyers since mid-January coincided with renewed demand for medium term options. (See the chart of three-month at the money implied volatility below.) This is a trickle of demand, not a surge, and Thursday’s vol. fall is backed by still-quiet overnight and daily contracts. But resumed cognizance of no-deal risks are vying with unfounded assumptions of a Brexit delay. The Bank's risk assessments were well-hedged but may still come back to haunt the complacent.