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Dovish Outlook As Brexit Approaches

Updated: Jan 30, 2020

| January 30, 03:23 GMT | By Ismail Esat

With the pending decision on 31st January 2020, the European Parliament have given their final approval to Prime Minister Boris Johnson’s BREXIT plan ensuring that the UK will leave the EU with an agreement in place.

With the Parliament’s backing In Brussel being a legal requirement for Britain to leave the EU with a deal, the support shown was ultimately a formality with the votes in favour by 621 votes to an insignificant 49. Over the course of the year, the UK will be expected to negotiate terms which may prove to be more strenuous than the actual withdrawal itself.

The Bank of England’s (BoE) monetary policy decision

With the BoE’s pending interest rate decision, it looks to be seen whether we could see short term pound strength before the UK’s exit on the 31st January. With the forecast expected to remain the same, we could see some upside in the British currency which would also price in news, with the majority expecting a decline in the pound once the UK’s exit from the EU is concluded. According to analysts at Wells Fargo, the central bank is expected to keep its interest rate unchanged at 0.75% which would support the current market consensus.

Key Quotes

Jeremy Stretch, head of G-10 currency research at Canadian Imperial Bank of Commerce stated that if the interest rates are held by the BoE, then we may see a “relief rally in sterling which would just provide better levels to sell against.” Currently the pound is seen to be ranging between the 1.2960-1.3020 area and the decision on Thursday could see the pound climb to price in the expected Friday news.

There have been reports suggesting that the BoE could ease policy, however still expecting the pound’s decline to be contained. UniCredit Spa strategists have suggested that if the BoE does cut the interest rates, then the sterling’s retreat would remain “relatively contained due to indicators in the options markets and investor positioning”.

Stuttgart-based Landesbank Baden-Wuerttemberg, who are recognised as one of the most accurate pound forecasters in recent months, have projected the pound strengthening “nearly 12% to £1.45 at year-end”

The current technical analysis can see the pound ranging between the 1.2960-1.3020 area since the final week of January. Based on the interest rate decision on Thursday, we could see the pound climb to the 1.315-1.317 area providing us with short-term sterling strength. However, any upside movement is likely to be eradicated come the pending Brexit decision on Friday.

Recent dovish comments from policy makers in addition to conflicting data on the current state of the economy has seen fluctuations in the pound. In recent weeks, the chances of a rate cut were standing at 70%. But recent positive GBP data has seen those chances reduced to 40% and this would further be supported by the EU’s approval of the UK’s BREXIT deal. However, any strength in the pound on Thursday is likely to be overshadowed by the all-important decision on Friday 31st January 2020.

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