- Summary:
- GBP to INR exchange rate declines to a fresh seven-week low on Brexit challenges, a weak UK economy, and the BoE possibly cutting rates in January.
As trading opened for the new week, the GBP to INR exchange rate dropped to a fresh seven-week low.
The main driver behind the move lower in the GBPINR is that investors and traders are positioning themselves for rate cuts by the Bank of England, BoE. The break to the December 29 low in the GBP to INR exchange rate has now opened the door for further declines in the weeks ahead. The GBPINR pair might slide as low as 88.98 as long as the price trades below the 93.50 level.
Background to the slide in GBPINR
The British pound has been under pressure following the December 12 general election, as the market knew following the election outcome that the risk for a no-deal Brexit had declined. However, the challenges for the UK remain in play, as the new government needs to come to a new deal with the EU before the end of the year, yet your typical trade deal takes about seven years to complete, leaving it likely that the new UK-EU deal will be a watered-down type of trade deal, much like the “Phase one” US-China trade deal.
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UK GDP Disappoints, BoE Getting Ready to Cut Rates
Earlier today, UK GDP data for November showed that UK GDP came in at -0.3%, which is well below the expectations of 0.0%, and the slowest growth since June 2012. GDP is the broadest measure of economic activity in a country, and the latest reading has raised the likelihood of a Bank of England rate cut at the January 31 rate meeting.
The head of the bank of England, Mr. Carney, said last week that the bank was ready to reduce interest rates by 25 basis points. Also supporting the dovish outlook were comments by Gertjan Vlieghe, an external MPC member of the Bank of England, and he said he was committed to lowering rates, form the current rate of 75% to 0.5% of UK data continues to soften by the end of January. The view was echoed by another member of the Bank of England, Silvana Tenreyro, and she said on Friday, that she was ready to vote for a rate cut in the “coming months” if the economy would not bounce back.
The weakness in the UK GDP is not new, and already last summer, the economy was close to slipping into recession. However, the Bank of England was reluctant to reduce rates as the GBP was declining, and rate cuts would only have caused the currency to fall further and boost inflation, causing spending to reduce as households were getting squeezed.
As the trading day was coming to an end, the rates markets were giving it a 47% probability of a rate cut at the next rate meeting. If the Bank of England goes ahead with the cut, the new interest rate will be 0.5%.
GBP to INR Outlook
The GBPINR trend is upwards since July 31, 2019. The move higher happened on the heels of “no-deal” Brexit being priced out, but also as the political situation in India worsen. In August, the Indian Government revoked the autonomy of Jammu and Kashmir states, and the government sent thousands of military troops to support their move. The action caused the INR to soften. However, in the last few weeks, the upwards trend in GBPINR has diminished, just to turn lower today. The GBP to INR exchange rate was trapped in a triangle pattern that was formed since late November. The price breached the lower upward rising trendline today, and as long as the price trades below the 93.50 level, the price is at risk of trading lower, and could possibly reach the price target of the triangle pattern at 88.98.