Pound Sterling Outlook Remains Neutral Ahead of Bank of England Interest Rate Announcement

Published: Thursday, 4 August 2016 08:00 BST - Written by David Woodsmith

STORY LINK Pound Sterling Outlook Remains Neutral Ahead of Bank of England Interest Rate Announcement

UK Headed for Recession But Pound Sterling (GBP) Exchange Rates Steady

The latest surveys from leading polling company Markit, published yesterday, suggested that the UK economy is heading for a recession. Markit explained quite how bad the result of its benchmark tertiary sector version of the UK Purchasing Manager Index in its accompanying report, stating that,

‘The Business Activity Index fell to 47.4 in July, from 52.3 in June, signalling a fall in UK services output. This was the first contraction since December 2012, and the rate of decline was the strongest since March 2009. Moreover, the month-on-month decline in the Index in the latest period, at 4.9 points, was the largest observed since the survey began in July 1996.’

GBP Gains on EUR, USD, Can the Pound Extend Advance?

However, the Pound Sterling (currency : GBP) recorded sustained gains against the other sixteen most actively traded global currencies on the day yesterday in spite of the worrying survey result. The driver behind this price action was also provided in Markit’s report which described a UK interest rate cut from the Bank of England’s monetary policy committee as a ‘foregone conclusion’.

Chris Williamson of Markit struck a downbeat tone, observing in his comments which accompanied the report that,

‘It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn. However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession.’

BoE Interest Rate Decision Forecast to Drive Currency Exchange Rate Movement

Turning to today’s BoE policy announcement, Williamson stated that,

‘the extent of any downturn clearly depends to some degree on the policy response. The PMI is already deep into territory which would normally spur the Bank of England into taking action to stimulate the economy. A quarter-point cut in interest rates therefore seems to be a foregone conclusion at tomorrow’s Monetary Policy Committee meeting, though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty and the subject of intense speculation.’

Given that investors have so convincingly put the cart before the horse and priced in a 25 basis point cut to UK interest rates from the Old Lady of Threadneedle Street this afternoon, analysts forecast that the Pound may not necessarily lose much ground post-announcement. FX insiders feel that something more than a quarter point cut will be required to hurt the Pound – an upping of the Bank’s Quantitative Easing programme, or a promise of further rate cuts to come, will be required to send Sterling significantly lower.

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