Sterling dipped far in comparison with the dollar index on Thursday. The dollar was steady at 95.565, above a recent six-week low of 95.003. The trade was set to be dominated by the Bank of England’s expected first interest rate cut in seven years, since 2009, in hopes of circumventing the forecasted recession brought by the UK’s vote to leave the European Union.
The U.K. central bank is hugely expected to cut its standard interest rate to a new record low of 0.25% and possibly also expand its monetary easing program in hopes of boosting the economy after the Brexit vote in June. With the market now becoming heavily short on the U.K. currency, pound is pushed to around $1.31 in the recent weeks because of the anticipation of a big easing package.
BoE surprised market participants by failing to deliver any policy moves at its July meeting, and analysts are now virtually confident that Gov. Mark Carney and the bank’s Monetary Policy Committee will announce some highly anticipated easing measures aimed at countering the Brexit-induced hit to the economy.
Poor Economic Indicators
Although having stated in the bank’s July minutes that the bank had no official data on economic activity to warrant a rate cut, the poor data puts pressure on the BoE. Economic indicators have pointed down since Brexit. The purchasing managers index readings have raised concerns, pointing to the most arduous pace of contraction in the economy since 2009. In July, the all-sector PMI fell to 47.3 from 51.9 in June, its biggest one-month fall in almost 20 years. “The weak numbers provide powerful arguments for swift policy action to avert the downturn becoming more embedded and help to hopefully play a part in restoring confidence and driving a swift recovery,” said Rob Dobson, senior economist at Markit.
Moreover, a gauge on consumer confidence in July dropped the most in 26 years, and some companies have announced job cuts due to the uncertainties brought by Brexit. These combined factors made it seem inevitable that the BoE will meet market expectations and do some easing.
The factors mentioned above might be enough of a reason for a recession. The tone of the quarterly inflation report and the policy statement will be closely gauged today. Analysts at HSBC said that this is the first time BoE will be able to publicly measure Brexit’s impact to the economy, which puts policy makers in a risky situation.
“Given the early data—most notably the weak flash PMIs for July—we think the bank will forecast a slightly lower than consensus growth number for 2017, possibly including a technical recession,” the HSBC analysts also said.
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