Many are expecting the Bank of England to cut interest rates on Thursday, but does the data support it?
Yesterday morning PMI (Purchasing Managers Index) Construction data for July was registered at 45.9, only fractionally worse than the 46 recorded in June. Although this figure was poorer than the previous month, economists had predicted a far worse outcome and Sterling gained on the positive news. This shows a stark comparison to the Manufacturing PMI data released on Monday which was far gloomier, falling by almost a whole point. We will see our third PMI reading tomorrow, this time for the Services sector, and the three combined will give us a good idea of the immediate fallout of the Referendum result.
The key release this week which will be eagerly anticipated by Investors is the Bank of England Interest Rate decision at 12pm on Thursday. It is expected that the BoE will cut rates from the current level of 0.5% for the first time since 2009, to 0.25%. It was anticipated that they would cut rates at their last meeting in June, but had disappointed markets by keeping rates on hold. Since then, the Monetary Policy Committee has dropped heavy hints towards taking action, and polls are suggesting that the vast majority of economists are also expecting a cut. If this is the case, this would almost certainly cause GBP/EUR rates to plummet. To put it into perspective, when the BoE last cut Interest Rates in March 2009, GBP/EUR fell by 6%, and if this were to follow in the same path we could see the pairing fall to 1.11, which was last seen back in 2011. Anyone with a large currency requirement could completely eliminate their exposure to such a fall by taking advantage of our Forward Contract option, where today’s rate of exchange is secured for any period up to 12 months.
There is also the potential of an even greater cut to 0%, as predicted by Allan Monks, economist at JP Morgan. Another option at the BoE’s expense is to implement further Quantitative Easing, but this has previously been contested as to whether this has much of an impact on the economy. I feel that either way, any change, or hints towards change, of Monetary Policy announced tomorrow will cause pressure on the Pound, and I would strongly recommend speaking with your Account Manager at currencies.co.uk to plan your currency purchase around this key release.
Getting in touch with us prior to Thursdays interest rate decision could be useful if you plan to buy Euros with Sterling. Call our trading floor on 01494 725 353.
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