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Revised BoE Growth Forecasts Failed to Encourage GBP/CHF Exchange Rate Rally

February 2, 2017 - Written by Tim Boyer

The mood towards the Pound deteriorated markedly on Thursday, despite the Bank of England (BoE) substantially raising its growth forecasts for 2017.

Less Hawkish BoE Prompted Pound Sterling Downtrend

While the BoE took a more optimistic view of the economy in its latest quarterly Inflation Report this was not seen to indicate any greater willingness to raise interest rates in the near future.

Indeed, Governor Mark Carney reiterated that the next move in rates could be either up or down, given the persistent uncertainty connected to Brexit.

As James Knightley, Senior Economist at ING, noted:

‘Currently, the implied probability of a rate hike from the Bank of England (based on the OIS curve) is 39% while the chance of a rate hike by end 2018 is 76.8%. Given the downside risks to growth and upside risks to inflation that Brexit is creating we forecast no change in Bank Rate until 2019.’

As January’s UK Construction PMI also failed to impress, offering further evidence of rising inflationary pressure, there was little in the way of support for the Pound at this juncture.

Franc Dented by Poor Swiss Retail Sales

Demand for the Swiss Franc was not overly robust, however, as Swiss retail sales were found to have contracted far more sharply than forecast in December.

This latest sign of weakness within the domestic economy did not bode well for the outlook of the Franc, particularly as the general demand for safe-haven assets declined sharply on Thursday.

Even so, the continued high levels of uncertainty and political risk that face the global landscape are likely to maintain some level of underlying support for the Franc in the near term.

Nevertheless, this weak showing was ultimately not enough to prevent the Pound Swiss Franc (GBP CHF) exchange rate from extending its slump further.

GBP CHF Exchange Rate Forecast: Weaker UK Service PMI Could Weigh on Pound

Volatility is likely for the GBP CHF exchange rate ahead of the weekend, with investor focus turning to the UK Services PMI.

As the vast majority of domestic economic activity is based in the service sector any softening here could exacerbate the Pound’s weakness, undermining confidence in the resilience of the economy.

If the report also highlights signs of rising inflationary pressure this could increase the bearishness of Sterling, given that the BoE has continued to pledge to look through some degree of Brexit-based inflation.

Support for the Franc could come in the form of the latest US labour market data, if a stronger jobs figure prompts a general decline in market risk appetite.

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TAGS: Currency Predictions Pound Swiss Franc Forecasts

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