Sterling fell below $1.30 for the first time in almost a month as investors prepared for data that will give further clues on the state of the UK economy in the wake of the decision to quit the European Union.
Britain's currency dropped for a fifth day and ceded ground to all of its 16 major peers amid speculation the reports, due next week, will show an economy reeling from the Brexit vote on June 23rd. The euro has traded up to 85.39p, having closed at 85.03p on Monday.
Sterling is suffering its longest losing streak since May after the Bank of England cut interest rates for the first time since 2009 in its August 4th policy announcement, while exceeding economists’ expectation son quantitative easing.
Sterling was depressed further after Bank of England policymaker Ian McCafferty warned in the Times newspaper on Tuesday that further rate reductions and quantitative easing may be required. That's all the more surprising because as recently as January he was voting to raise rates.
The UK National Institute of Economic and Social Research (NIESR) has already estimated that gross domestic product (GDP) fell by 0.2 per cent month on month in July.
Negative
“Investors are gradually coming to realise that the Bank of England is going to cut this year – that’s going to be negative for the currency,” said Charles St Arnaud, a senior economist at Nomura International in London.
“That should have been already priced in. So the question becomes: how much more negative can we get for the pound without any more bad news?”
The pound fell 0.3 per cent to $1.2997 as of mid-morning in New York, slipping below $1.30 for the first time since July 12th.
Sterling is in its longest stretch of declines since May 9th and has dropped 1.8 per cent this month, the worst performance among major currencies.
Inflation
UK inflation and employment figures for July, key indicators for how the UK’s economy is faring post-Brexit,will follow data that has already shown contractions in services and construction as well as consumer confidence.
Mr McCafferty opted to increase borrowing costs in the six Bank of England meetings from August 2015. While he was in favour of the rate cut at the monetary policy committee gathering last week, he was one of three officials to vote against more quantitative easing.
Alongside a quarter-point rate cut, at that latest meeting the Bank of England announced it would increase its gilt-purchase programme by £60 billion pounds (€70 billion) to £435 billion (€509 billion) to offset the impact of the referendum result. The additional purchases started on Monday and are due to be completed in six months.
“We could see some short-term weakness in the pound,” said Janu Chan, a senior economist in Sydney at St George Bank, which nevertheless predicts a rally to $1.33 by year-end.
“It was an extensive stimulus programme that the Bank of England announced. The economy has been hit in the short-term, and could face a minor recession.” – (Bloomberg)
