Sterling endures rollercoaster afternoon as Bank of England slashes growth forecasts but Brussels talks offer Brexit hope

Sterling has endured a rollercoaster ride this afternoon after the Bank of England slashed growth forecasts but a glimmer of hope emerged for Theresa May’s Brexit deal in Brussels.

The Bank cut its UK growth forecasts to 1.2 per cent in 2019 – from a previous 1.7 per cent projection – citing mounting Brexit uncertainty and a global economic slowdown.

Read more: Juncker refuses to reopen Brexit negotiations

Governor Mark Carney said it now seemed that “not everything may be tied up in a neat package by the end of March” and predicted business investment to further soften until much-needed clarity was provided over Brexit

Sterling’s volatile afternoon

Sterling dropped around 0.4 per cent immediately after the bank’s cut growth forecasts, sliding to $1.286.

But the currency rallied after governor Mark Carney said Brexit clarity would boost forecasts and a “robust but constructive” meeting between Theresa May and Jean-Claude Juncker in Brussels.

The pair agreed to continue talks in an effort to push the withdrawal agreement through parliament, although Juncker insisted the deal was not up for renegotiation.

“Initially despondent, falling as much as half a per cent against the dollar after the Bank of England briefing, the pound perked up significantly as the day went on,” Spreadex analyst Connor Campbell said.

“The currency, perhaps making the most of the minor signs of progress between the UK and EU following a ‘robust’ meeting in Brussels and the scheduling of another tete-a-tete on Monday,” he added.

Has the Bank moved away from its hawkish stance?

Carney denied the February inflation report was a move away from its plan for “gradual and limited” interest rate hikes in the future.

But analysts said the bank’s comments were more dovish than expected and that the Bank was hinting at fewer hikes in the coming years.

“We have long been sceptical that the MPC would be able to sustain its previously hawkish rhetoric and the sands do now seem to be shifting,” Oxford Economics associate director Andrew Goodwin said.

He added that it marked a “change of attitude” from the bank and implied one fewer hike than expected over the next three years.

Wells Fargo investment strategist Brian Jacobsen said: “The Bank of England tilted dovish, but tried to maintain its hawkish bent,”

“Lowering their trend rate of growth means they can justify rate hikes in the future, but not yet.”

European stock markets rocked

The FTSE 100 has fallen 0.9 per cent as the pound rallied but analysts said the sharp drop in European markets suggested investors feared the Eurozone was in freefall.

It comes after the European Commission (EC) also cut growth forecasts earlier today, blaming Brexit and the slowdown in China.

The EC slashed its forecast for Italy to just 0.2 per cent for the whole year, compared with a previous forecast of 1.2 per cent, while it also trimmed Germany's forecast to 1.1 per cent from 1.8 per cent.

The Eurozone growth forecast was also cut to 1.3 per cent, down from the 1.9 per cent predicted in November.

The Euro Stoxx – an index of 50 Eurozone stocks – fell 1.6 per cent for the day, led by the German DAX which plummeted 2.3 per cent.

Read more: Bank of England slashes UK growth forecast

“Eurozone stocks are suffering greatly as investors are fearful the region could be in for an economic downturn,” CMC Markets analyst David Madden said.

“The EU also have a lot to lose should the UK leave without a deal, and the deteriorating economic condition could not come at a worse time,” he added.