The British economy showed its first signs of contraction after last weeks PMI release. Wednesdays GDP figures may force the Bank of England to act by cutting interest rates in its August meeting.

UK economy at lowest level in 7 years

With Britain deciding to vote to leave the European Union recently this has caused economic activity to fall to its lowest level since 2009. The Purchasing Manager’s Index showed a fall to 47.7 in July and this is the lowest since April 2009 and anything below 50 represents a contraction.

Exports picked up owing to the fall in Sterling but overall the news was very negative and this caused Sterling to fall by over 1% against the Euro from the high to low during Friday morning’s trading session. The report was published by Markit and their chief economist Chris Williamson suggested that the British economy could contract by 0.4% in the third quarter and that the downturn has been ‘most commonly attributed in one way or another to Brexit.’

The real issue for Sterling exchange rates is that the economic data covering the Brexit period has not yet been released and the key data is likely to come out by the middle of August. If the data due to be released in the next fortnight shows further problems for the UK then this could really hit the Pound and cause a big loss of confidence. With the Pound having gained since new Prime Minister Theresa May took over the upcoming data could erode Sterling’s recent advances.

UK GDP data set to influence the Bank of England

UK Gross Domestic figures for the second quarter are due out on Wednesday for both quarter on quarter and year on year. The figures will be extremely important to how Sterling may perform as this quarter includes the Brexit period. Bank of England governor Mark Carney has spoken out in favour of acting to support the British economy in the wake of the Brexit vote and depending on what happens with this data release this could influence next week’s interest rate decision. If you’re worried about what may happen in the future you may wish to consider buying a forward contract which allows you to fix an exchange rate for a future date for a small deposit.

Brexit to cause risks to the global economy

According to finance chiefs from the G20 over the weekend the UK’s decision to leave the European Union has caused global uncertainty. The main focus of the discussion was the Brexit but the outcome was that the G20 has enough tools to cope with the fallout from the vote.

In the third quarter a total of 66 companies have signalled profit warnings, which is the most since the credit crunch of 2008 and the International Monetary Fund have downgraded the UK’s economy from 1.9% to 1.7% for 2016 and the global economy from 3.2% to 3.1%.

Thank you for reading my Pound Sterling currency report, if you have any questions about Sterling exchange rates I would be more than happy to discuss them – you can contact me with any queries at teh@currencies.co.uk or call our trading floor on 01494 725 353.

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