Pound fluctuates with traders bracing for rates decision by BOE
The pound fluctuated before the Bank of England announces its interest-rates decision on Thursday as traders are wedged in between weaker economic data and extreme positions some have taken that make the currency especially vulnerable to a surprise outcome.
Sterling erased some of Tuesday’s gain versus the dollar, which was the biggest in three weeks, after a report signaled U.K. services shrank at the fastest pace in seven years. That added to speculation the BOE will ease policy to head off an economic slowdown. All but two of 52 economists in a Bloomberg survey predicted a cut in rates that would be the first since March 2009.
With swaps prices indicating the probability of a cut Thursday at 99.7 per cent, and speculative investors being the most bearish on the pound since records going back to 1992, some are adjusting positions to limit potential losses in case the BOE surprises by keeping rates unchanged.
“Sterling has been volatile this week as the market has turned its attention to the BOE’s decision tomorrow,” said Ned Rumpeltin, the London-based European head of currency strategy at Toronto Dominion Bank. “The large overhang of short pound positions has created some near-term demand for the currency. We are looking for a comprehensive package of easing measures that should fuel an additional broad-based depreciation of the pound.”
Sterling dropped 0.2 percent to $1.3326 as of 4:22 p.m. in London, having gained 0.1 percent earlier. The U.K. currency is up from a 31-year low of $1.2798, in a rally helped by a 1.4 percent jump on Tuesday, the biggest gain since July 14. The pound strengthened 0.2 per cent Wednesday to 83.86 pence per euro.
Ten-year U.K. government bonds were little changed after a two-day decline, with yields close to their highest in a week, at 0.80 percent.
Recent economic data suggested Britain’s decision in June to leave the European Union is taking its toll on business confidence and that’s further supported by data today. Markit Economics said its Purchasing Managers Index of services slid to 47.4 in July from 52.3 in June, below the 50 level that divides contraction from growth.
“These figures support speculation that we will see an interest-rate cut tomorrow,” said r, an economist at UBS Wealth Management. “Time will tell if a recession is on the cards, but it is clear we now face a period of lackluster growth, a sharp contrast to above-trend growth we’ve enjoyed for the last three years.”
Sterling has been the biggest decliner among major currencies since the referendum on June 23, falling about 10 percent against the dollar. It posted its third consecutive monthly decline against the greenback in July.
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