The big news on the market which is still being absorbed is the Bank of England’s (BOE) decision to not just cut the interest rates by 25bps to 0.25%, but the other measures they introduced last week. This was the purchase of both government bonds of the value of £60bn, corporate bonds of £10bn and the introduction of a new Term Funding Scheme. It would appear that the BOE, with all the information that they have access to, have tried to go down the path of prevention rather than treatment with regards to the result from the referendum impacting the economy.
This news had an immediate impact on the currency market last week and we saw GBP/EUR and GBP/USD rates drop by over 1.5% within a matter of 90 seconds. GBP/USD is now near a 30 year low and GBP/EUR, if you ignore a 36 hour period after the referendum result, is near a 3 year low. Moving forward the question now remains as to whether they have done enough to avoid a recession in the UK.
The argument stands that the UK economy remains at risk as we have seen:
• The National Institute of Economic and Social Research say last week that the UK has a 50:50 chance of falling into a recession within the next 18 months.
• The BOE make the biggest cut to growth forecasts since it started making them in 1992
• Activity within UK Manufacturers contract at the fastest pace for three years in July
• The UK job market suffer a dramatic fall in July, with full time hiring falling to levels not seen since before the recession of 2009
Through August it is widely expected that the UK Pound will remain under pressure. Importantly the economic data due through August is for July, the first full month following the referendum. It seems highly probable that this is when we could see the biggest contraction in the economy with a negative trend likely to impact Pound’s value.
The next data release to watch out for is tomorrow with UK trade data being released at 9:30 am. We also have a Inflation Report Hearing from the BOE at 10 am tomorrow which will be particularly interesting and may well confirm the negative trend we could see through August. Personally I would not be surprised if we were to see GBP/EUR levels down at 1.15 before we see 1.20 and GBP/USD levels below 1.30 before 1.35 is seen again. It seems that there are very few arguments to suggest the Pound will climb through August, meaning moving sooner rather than later may be wise.
Rates never move in a straight line so timing a transfer will remain key. Feel free to contact your dedicated broker here for a full breakdown of the schedule of information and therefore when rates may well be at their best.
Moving into September the economic data for the UK, even though probably worse than that released in July, will be better than that of those released in August; therefore Sterling will probably start to recover and climb through early September. The question however is will the gains seen in September be greater than the losses we could see in August? I personally think that the risk outweighs the opportunity, with so much uncertainty ahead regarding Brexit, there is more potential for downturn for Sterling, with little support for strength.
For more information on how this weeks data could impact your currency exchange transfer, call our trading floor on 01494 725 353.
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