BOE Warns of UK Recession Over COVID-19

<p>The Bank of England maintaining policy at current levels at yesterday’s March meeting. On the back of two unscheduled rate cuts this month, as well as the restarting of QE, the meeting was not expected to see a further adjustment and instead, focus was on the bank’s assessment and outlook.</p>
<h2>BOE Expresses Concern For Economy</h2>
<p>Against a backdrop of increasing uncertainty linked to the COVID-19 crisis, the BOE warned markets that a “very sharp reduction in activity” was expected in the UK as a result of the economic damage caused by the virus. The bank’s new governor, Andrew Bailey reassured investors that the BOE will do whatever is necessary in order to protect the economy and to stop a disorderly reaction in financial markets from exacerbating the situation.</p>
<p>With rates now at record lows of .10% and with £200 billion in QE announced, the bank has already taken aggressive action to help support the UK economy. The minutes released from the meeting suggest that some of the banks efforts are already starting to work as the bank noted that market conditions had “calmed” following its recent efforts.</p>
<h2>Recession Warning</h2>
<p>However, the BOE did note that its current measures would not prevent the UK economy from falling into recession. In the minutes released along with its decision, the BOE said: “The economic consequences of these developments are becoming more apparent and a very sharp reduction in activity is likely”.</p>
<p>The tone of the BOE’s discussion was one of clear concern, the BOE noted that “There is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment”.</p>
<p>In terms of forward guidance on policy, the BOE outlined tat its goal now will be to maintain financial market stability, to minimise disruption and to keep liquidity moving through banks to companies and households. The BOE said that its preferred strategy is to employ “measures to maintain the availability of finance or reduce the cost of borrowing, improving cash flows and supporting spending by consumers and companies”.</p>
<h2>Inflation To Fall Below 1%</h2>
<p>Along with the rate decision, policy statement and meeting minutes the bank also updated its business conditions report. In it, the BOE noted that many of its regional agents describe current conditions as “being worse than the financial crisis in 2008” noting “a sharp decline in spending on consumer services and non-food goods”.</p>
<p>Finally, in the bank’s updated inflation forecast the BOE forecasts inflation to fall below 1% in 2Q of this year. With inflation due to fall below half of the bank’ 2% inflation target, the BOE governor will be required to write a letter to the chancellor, Rishi Sunak, explaining the situation.</p>
<h2>Technical View</h2>
<p><strong>EURGBP (Bearish below .9097)</strong></p>
<p>From a technical viewpoint. The rally in EURGBP last week saw price trading up to test the early 2009 highs just ahead of .95. However, price has since reversed and is now trading back below the .9311 level (2017/2019 highs). Price action is now showing a potential tweezer-top formation on the weekly chart which could pave the way for a much deeper correction. If price breaks back below the .9097 level, this make a retest of the yearly pivot at .8690 the next objective.</p>
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