The pound took a further hit on opening this week as comments from the Bank of England (BoE) Governor Mark Carney at the end of last week and opening up the suggestion that the UK may be about to see a cut in interest rates from the BoE.
The next Bank of England meeting is scheduled for 30th January and this will be the final policy decision meeting for the incumbent Carney before handing the reigns over to Andrew Bailey in March this year. Reuters argue that there is good reason for Carney to make a decision to cut rates prior to this handover as it would allow the UK to catch up with the policy stance of both the US Federal Reserve and European Central Bank who both introduced monetary easing last year.
Reasons That May Influence a Bank of England Interest Rate Cut
Boris Johnson’s convincing majority in the UK general election significantly reduces the prospect of a disorderly Brexit which could have jeopardised the value of the pound significantly. This means that the BoE’s 2pc inflation target could have been impacted from a spike in import prices however, with this scenario seemingly avoided for now there is arguably more room to accommodate a cut from the current 0.75% headline rate argues Reuters Swaha Pattanik.
Yesterday’s GDP data for the UK adds further weight to this argument with economic growth for November declining to its slowest pace since 2012 shrinking by 0.3% in November and showing growth of just 0.6% from a year earlier. The pound fell to 1.1650 interbank rate versus the Euro and remains at the lower end of this range suggesting perhaps that traditional market forces are back in play as a resolution to Brexit finally appears possible. This weeks inflation data (Wednesday) and retail Sales (Thursday) for the UK could hold significant weight. Technical analysis places support for the pound/euro at 1.15.
In direct contrast to the Bank of England’s rhetoric Yves Merch, a European Central Bank member, speaks during a conference in Austria this morning and has painted a much more optimistic future for the Single Bloc highlighting that economic growth and inflation in the eurozone are showing “good signs of stabilisation.”
For those waiting for the pound to push back through 1.20 this twist sees the odds lowered on a boost to the value of the pound in the short term.
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