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Attention turns to the Bank of England this week, which is expected to hold interest rates.
The Bank of England and lingering fears over the UK economy and geopolitics mean the pound enters a significant week on unsteady footing.
Policymakers are poised to make their latest decision on the UK’s baseline borrowing costs on Thursday. Market consensus is for them to leave interest rates unchanged, yet a surprise is by no means out of the question. At the last meeting, five of the nine committee members opted to cut rates to 5%. With economic growth flatlining, it wouldn’t take much for them to double down on that decision.
Last week, GBP/EUR ranged by half a cent but was little changed from the week before. Sterling also made scant progress against the US dollar. EUR/USD meanwhile rallied to post modest weekly gains.
The Federal Reserve is also front and centre. That they will cut interest rates seems certain, although there is still uncertainty around the scale of the cuts. In recent days, expectation has shifted to a smaller 0.25% cut. A more aggressive cut of 0.5% is far from outlandish, and the US dollar could be volatile as traders look to manage that risk.
On Friday, the University of Michigan’s consumer sentiment index rose to 69, more than expected and marking the second consecutive monthly rise.
Russian president Vladimir Putin ratcheted up the tension among NATO members. Russia expelled six ambassadors from the United Kingdom on espionage charges. Putin meanwhile warned that he would perceive the use of western-made long-range missiles within Russia as an act of war.
The FBI is currently investigating what is suspected to be the second assasination attempt on Donald Trump. Over the weekend, gunfire was reported in Trump’s vicinity at a golf club in Florida.
Here’s what to look out for this week…
The ZEW economic sentiment index for Germany combines with US retail sales to give the early portion of the week some significant data.
UK inflation then arrives on Wednesday, with the headline rate predicted to fall to 2%. The Federal Reserve will then announce their highly anticipated interest rate decision after preliminary building permits for August.
It’s the Bank of England’s turn at midday on Thursday. UK retail sales are scheduled for Friday, capping off what feels like a key week for sterling.
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GBP: The case for a cut
It’s likely that the Bank will leave interest rates at 5%, however last week’s GDP data made the case for quick cuts. Sterling has benefitted from the slow pace of change, but policymakers will be mindful that they cannot afford to hamstring the economy.
GBP/USD: the past year
EUR: Weighed down
The European Central Bank didn’t have much choice but to cut interest rates last week. That has meant a period of weakness for the euro, which continues to be weighed down by tepid growth and lower rates.
GBP/EUR: the past year
USD: Quarter or half?
US dollar markets will be fretting over the scale of the Federal Reserve’s action ahead of Wednesday’s announcement. A half-point cut would be a minor shock at this point, but few will be willing to risk betting against that.
EUR/USD: the past year
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