This week saw pound to euro exchange rates experience some volatility as attention increased around the likelihood of the Bank of England looking to cut interest rates in the future. Sterling lost ground in early trading this week as investors concerns over the economy were heightened after Monday’s news that the UK economy contracted by 0.3% in November.
By Thursday afternoon the initial fears were being more carefully assessed, as a more balanced view considered the fact November was a time of increased political uncertainty, and that perhaps there had by nature been lower economic activity.
Friday’s Retail Sales came in worse than expected with the month on month figures indicating there had been a decline in activity of 0.6%, raising once again the expectations on an interest rate cut to 70%, according to Bloomberg news. GBP/EUR interbank rates dropped as low last week as 1.1638, before climbing back over the 1.17 level Thursday afternoon and finishing on Friday at 1.1705, although nudging to 1.1781 at its highest.
BoE Uncertainty Dominated the Headlines This Week for the Pound Sterling
The GBP is usually enshrouded in Brexit news and worries, but this week politics took a backseat and instead the BoE led the news headlines. The worries concerning a rate cut started at the end of the week when BoE governor Mark Carney hinted towards a cut in his dovish comments about the UK economy. This got the markets ears pricking up as the Conservative majority in the December election was expected to bring with it a business boom which would see the UK economy rise. Added to this earlier this week, three committee members from the BoE’s MPC also stated that they would vote in favour of a rate cut should the UK’s economic data continue its recent poor run.
Big questions remain over whether or not an interest rate is a good idea, since to cut interest rates now will leave them at 0.5% and leave little room for more cuts should there be any further economic decline ahead.
To be basing the data on last year when there was huge uncertainty over the outlook on Brexit, might also be unfair. With 2020 providing the UK with a more stable government majority and removing some of the initial political uncertainty plaguing the pound last year, the greater degree of political clarity might lead to a stronger economy.
Analysts Hopeful That the GBP Can Pull Back and Hold off BoE Cuts
Samuel Tombs, chief UK economist at Pantheon Macroeconomics says that the recent data releases, including the retail sales figures have certainly been backwards looking and have piled on the pressure for the MPC to cut rates on January 30th. But he remains hopeful that the GBP can pull itself out of its current rut and the flash composite PMIs released on January 24th can turn things around. Should this be the case for the UK, the BoE may hold off from cutting rates which could see the GBP rebound.
Next week will see further data of importance which may influence the currency market and might affect the performance of the pound. The UK interest rate decision is 30th January, and its relevance increased last week, and appears to be likely to remain an issue as we approach next week.
If you would like to learn more about factors influencing GBP/EUR exchange rates for an upcoming currency transfer, feel free to contact myself, Jonathan Watson, using the form below.