International Financial Outlook Report – January 2019
Summary of key forecasts
- Our central assumption remains that the UK and the EU will avoid a ‘no deal’ outcome, and that a political agreement will eventually be reached for an orderly departure. The House of Commons will vote on PM May’s ‘plan B’ on 29 January. Any amendments to the motion will be closely watched, with a second ‘meaningful’ vote scheduled to follow in February. Market volatility, however, could intensify given the prevailing political uncertainties. We maintain our central forecast for UK Bank rate to rise to 1.00% in Q3 2019. However, financial markets are not fully discounting the next rate rise until mid-2020, potentially due to continued ‘no-deal’ risk.
- The US Federal Reserve raised rates in December to 2.5%, as expected. FOMC comments suggest a risk that the next increase may not come until somewhat later in the year. We continue to see two further increases this year to 3%, though uncertainty regarding the timing has risen.
- In the euro area, the ECB confirmed an end to its net asset purchases and has maintained its guidance that interest rates are expected to remain at present levels “at least through the summer of 2019”. We continue to expect the first rate rise in Q4 2019, while financial markets anticipate this to occur in mid-2020. Risks around its timing have increased more recently.
- We retain our UK and German 10-year gilt yield targets for end-2019 at 1.6% and 0.6% respectively, while US 10 year Treasury yield forecasts remain at 3.2% for end-2019.
- We see GBP/USD and GBP/EUR at 1.33 and 1.08 by end-2019, implying a rise in EUR/USD to 1.23. However, there is a risk of higher volatility as we approach the March 2019 deadline for Brexit.