As the fallout of Brexit finds its way into economic releases, its likely that the Bank of England may have to act to limit economic slowdown.

Natwest and RBS warn of negative interest rates

The Pound opened lower across the board yesterday morning, after a letter sent by NatWest and RBS to their business clients became public information. The letter was sent to just under 1.3 million of the combined business and commercial customers of the two banks, enough to justify the market fall-out seen yesterday.

This announcement comes before the next Bank of England interest rate decision next week. This could be an attempt to soften the blow to their customers should any extreme measures to be taken, and is also a stark reminder to anyone considering buying a foreign currency that a cut is the likely outcome next month.

Why is it likely the Bank will cut rates next week?

Immediately following the vote for a Brexit, the Bank of England had a similar opportunity to drop rates. The consensus was that there was a 50-50 chance rates would be cut. However, the pressure on the BoE to intervene was lifted when Leadsom withdrew from the leadership race.

The Pound rallied heavily that week, a full four cents against the Euro as an example. Within 4 days we had a new Prime Minister, a new Government, and a loose promise to markets that Article 50 won’t be formally enacted until next year. All of which brought some confidence back to the UK, the Pound, and took a significant amount of pressure of the BoE. It would not be the only stabilising actor in the UK economy whilst we waited for fresh leadership on the Brexit, and as such decided overwhelmingly to keep rates on hold.

However, now the understanding of the UK’s situation is more comprehensive. Preliminary data for this month for business conditions in the UK is suggestive of a struggling economy. The lowest results in seven years in Friday’s business survey resulted in forecasts for a quarterly contraction rate of 0.4% in manufacturing and service sectors.

By the time the Bank meets next Thursday, we would have also seen data on construction output, and inflation report hearings. A more detailed look at the stalling effect the UK vote to leave the EU is having on its economy may force the Bank to act, and any such fall in interest rates should herald a further fall in the Pound’s value.

First look at GDP data to be released for Quarter two

In the meantime a first look at growth for the three month period in the UK between April and June will be released at 9:30 am this morning. With the landscape having totally changed in the UK since July 24th, this is unlikely to cause much of a stir.

I strongly recommend that anyone with an upcoming foreign currency requirement should detail this to their account manager. We may be subjected to very sudden movements next week, and it is important to be in-tune with what expectations are showing, otherwise waiting could become an expensive strategy. In these instances forward contracts are a popular option, where pre-booking your currency permits you to avoid having to accept any lower levels which emerge at a later date.

Thank you for reading today’s Sterling report, If you have any questions regarding the report, I am more than happy to assist you. Feel free to e-mail me at jjp@currencies.co.uk.

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