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Losses Forecast for British Pound Sterling GBP on People?s Bank of China Action

March 3, 2015 - Written by John Cameron

The US Federal Reserve and the Bank of England might be tentatively countenancing an interest rate hike, but there are other major central banks which are moving rapidly towards a looser monetary policy. The People’s Bank of China (PBoC) announced on Saturday that it would be cutting its one year lending rate by 25 basis points to a relatively lowly 5.35%. The move represented the PBoC’s second rate cut in the space of the last three months, signalling the depth of concern which China’s policymakers feel regarding the falling pace of price rises in the world’s second-largest economy.

According to Julian Evans-Pritchard of Capital Economics, the PBoC’s weekend move may prove to be the thin end of the wedge – he stated yesterday that, ‘even after Saturday’s rate cut, policymakers will need to do a lot more to prevent growth slipping next quarter’. If China’s reserve bank does mimic Western economies and goes down the path of an ultra-loose monetary policy, then expect the Commodity Dollars to enjoy widespread support. Analysts forecast that such a development would be likely to see the Pound Sterling (currency:GBP) record steady losses against the Australian Dollar (currency:AUD), New Zealand Dollar (currency:NZD) and Canadian Dollar (currency:CAD) as the flow of easy money provided further fuel for the risk-driven tenders.

Meanwhile, yesterday’s data from the UK’s housing sector provided further reason for pessimism for investors holding the Pound. The latest Nationwide House Price Survey revealed that the average British property price dropped from £188,446 in January to £187,964 last month, suggesting that the Bank of England’s policy of restricting domestic levels of mortgage lending is having its desired effect in cooling transactional levels in the UK’s housing market. Yesterday’s morning’s weaker than anticipated British mortgage lending figures for January corroborated this theory.

Looking ahead, the main event for Pound Sterling-watchers, comes in the form of this morning’s Markit/CIPS PMI survey of the UK’s construction sector. Commentators predict that it will show a slight downward movement from last month’s 59.1 showing.
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