Pound (GBP) Exchange Rate Forecast: Brexit Impact Assessment in the Spotlight
The outlook for the Pound Norwegian Krone (GBP/NOK) exchange rate grew slightly darker on Thursday as markets reacted to the release of a confidential Brexit impact assessment, a gloomy release that claimed that diverging from EU rules could cause massive economic damage to the UK’s economy.
The analysis explored three different scenarios and concluded significant losses in each, claiming that ‘the most important driver of the GDP estimates is the change in non-tariff barriers in each scenario’.
The document also suggested that a Brexit ‘dividend’ for the government was extremely unlikely.
It should be stressed, however, that the government itself denounced this assessment, pointing out that the analysis did not take into account the Brexit trade deal that Downing Street has in mind, or indeed the possibility of capital that would result from trade deals with other nations once the UK is freed to achieve them.
Nonetheless, this news came quickly on the heels of yesterday’s speech from EU Council President Donald Tusk, in which he rejected the UK’s proposal for a bespoke trade plan, ultimately leaving Sterling on poor form.
Norwegian Inflation on the Horizon – What can Markets Expect for the GBP/NOK Exchange Rate?
The Norwegian Krone could extend its lead against the Pound tomorrow, depending on the performance of Norway’s highly anticipated inflation release.
Markets are currently expecting the month-on-month inflation rate in February to print at 0.3%, up from the previous period’s -0.1% contraction.
The yearly reading is also expected to climb, with the market consensus pointing to a rise from 1.6% to 1.8%.
This would be increasingly close to the bank’s new target of 2%, with the government having recently reduced the target from 2.5% to bring it in line with other banks such as the European Central bank and the US Federal Reserve.
This decision is pertinent in that Norwegian policy makers have also signalled that they will increase rates later this year, having passed the worst of the collapse in the country’s oil industry.
In this respect, a rise in inflation would raise rate hike prospects and likely put the GBP/NOK exchange rate under extended pressure.
BoE Rate Hike Prospects and the GBP/NOK Exchange Rate – Can we expect a Hawkish Move in May?
Markets might be distracted by the Brexit negotiation process, but bubbling under the surface there is a great deal of anticipation and optimism building for a possible hawkish move from the Bank of England (BoE) in May.
Analysts currently place an overwhelming majority of Monetary Policy Committee Members (MPC) within the hawkish category, including Governor Mark Carney, Deputy Governor Ben Broadbent and MPC members Michael Saunders, Ian McCafferty and Gertjan Vlieghe.
This leaves only 2 members within the dovish category and 2 regarded as centrist, thus a rate hike next month could be very likely.
Nonetheless, the performance of notable ecostats between now and then could still be the ultimate deciding factor, with a slowdown in UK consumer prices still liable to drop forecasts.
Alan Clarke, Head of European Fixed Income Strategy at Scotiabank shared this perspective, stating:
‘…we fully expect that rate call to be challenged in the coming months if CPI inflation does slow sharply’.
Beyond this, there is the possibility that Brexit negotiations could continue to suffer impasse after impasse, thus delaying clarity for British businesses and potentially hurting growth.
Indeed, this eventuality could mean that a rate hike in May would then not be followed with another until the next year.