Pound Sterling Outlook Fairly Positive, Owing to Recent IMF Statements

May 12, 2016 - Written by John Cameron

STORY LINK Pound Sterling Outlook Fairly Positive, Owing to Recent IMF Statements

The Pound has fared relatively well against its peers today, possibly on account of the International Monetary Fund (IMF) making a strong case for remaining in the EU.

The biggest news of the day, the BoE announcements for May, have boosted the Pound considerably today. However, a constructed argument by 'Out' campaigners could derail the current GBP positivity tomorrow.

Bank of England (BoE) Downgraded UK Growth Forecasts for 2016 but GBP Gained

This afternoon’s Bank of England (BoE) monetary policy announcement, with the Quarterly Inflation Report which accompanied it, have had a surprising effect on the Pound Sterling (currency : GBP).

The Bank once again downgraded its 2016 UK Gross Domestic Product growth forecast – this time it was trimmed from a year-on-year 2.2% to 2.0%. Meanwhile, the minutes of the BoE policy meeting, published at the same time, also weighed on the Pound, observing that,

‘The most significant risks to the MPC’s forecast concern the referendum. A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy. Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise.’

The Bank went on to link the two strands, by suggesting that,

‘given the conditioning assumption that the United Kingdom remains in the European Union, this weakness is projected to unwind over subsequent quarters. There are risks around this path: if uncertainty effects are weighing more on the data than assumed then underlying momentum may be greater; conversely if uncertainty effects are weighing less then underlying momentum may have slowed more than assumed.’

GBP/EUR Exchange Rate Advanced following BoE Announcements

Investors were surprised by the market reaction to the Bank’s commentary; given that the minutes of the MPC meeting also revealed that, for the fourth month on the trot, the nine-member committee had unanimously voted to maintain British interest rates at their current record low of 0.50%, some downside for the Pound might have been anticipated.

Sterling shot up through the 1.27000 GBP EUR threshold against the euro (currency : EUR) following the Bank’s announcements, having loitered in the low 1.2600s during early trade.

It appears likely that investors were shocked by the strength of the Bank’s warnings on the negative effect of Brexit on the UK economy. However, analysts forecast that following BoE Governor Mark Carney’s suggestion that the British economy could face a full-blown recession and that domestic interest rates could fall further, the medium term outlook for the Pound remains neutral to negative.

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TAGS: Euro Forecasts Pound Euro Forecasts Pound Sterling Forecasts