This GBP exchange rate update examines factors that could affect Sterling this week, discussing today's Bank of England meeting and inflation report.
The pound took losses against all of the major currencies yesterday after industrial production and manufacturing numbers came in worse than expected. Factory output has fallen to its lowest in 3 years and reflects a fall in iron and steel manufacturing as a result of the global economic slowdown.
This afternoon sees the Bank of England meeting and quarterly inflation report where it is almost a certainty the central bank will hold its nerve and make no changes. Despite a recent softening in the UK economy it is not likely to be enough to make any change to monetary policy. GDP for the first quarter recently fell to 0.4%, something that will be on the committee member’s minds especially considering the National Institute of Economic and Social Research (NIESR) believes this figure will fall lower to 0.3%. Some of this is likely to be attributable to the referendum uncertainty although it may just boil down to a simple weakening in the UK economy stemming from stagnant manufacturing and construction sectors let alone the introduction of company pensions and businesses adjusting to higher wage costs.
The focus for the Bank of England now is to prepare for financial volatility after the referendum. Contingency plans are now being set up in the event of a Brexit. It has been reported that Mark Carney has spoken with city bank managers to discuss the prospect of whether individual banks could weather a cut in interest rates post Brexit if required. This seems to be a likely option for the central bank to give a quick injection of monetary easing into the economy. This would likely be sterling negative with interest rates sitting at all-time lows amidst all the other uncertainties in this hypothetical post Brexit scenario.
The NIESR came out on Tuesday and claimed that sterling could lose 20% in the event of a Brexit. In my view this seems too much considering the pound has already fallen by 10% since the beginning of the year although I don’t doubt the pound would weaken sharply if Britain leaves.
From here on the pound is likely to be under much more pressure as we mark a turning point in this referendum campaign. Now that Boris Johnson has left city hall and has now started his official campaigning to leave the EU, the political gloves are now very much off. The strategy for the Remain campaign has the potential to backfire as it is being accused of scaremongering.
George Osborne has said previously that mortgages for home owners will go up; this week he has said that property prices will go down whilst David Cameron has hinted we are more likely to go to war in the event of Britain leaving the EU. This is going to be a hugely interesting time in British politics and I would expect many more bombshells to come out in the media which in my view will have a direct impact on the Pound.
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