Hi there James here
The British pound would fall another 300 points falling to a 25 month low, as the second quarter flat growth reading reported the week prior would set the tone for Sterling sentiment. Consumer confidence and home mortgages mildly improving didn’t to anything to change the mind of Pound Bears. Meanwhile, the CBI retail trade report setting another record low of -46 following the previous month’s record of -36 would convince traders that the country was heading for a recession.
The upcoming BoE rate decision will be one the most difficult for policy makers as the evidence mounts that the country is fast approaching a recession, while inflation remains far beyond the MPC’s 3% threshold at 4.4%. Although easing oil prices have reduced price pressures, costs will have to fall significantly to get near the 2% target. Following the last policy decision Governor King forecasted the slowing growth would bring consumer prices under their target in two years which opened the door for a future rate cut. However, all 61 economists surveyed by Bloomberg are predicting a rate hold at the next policy meeting. Therefore, the rate decision may not provide that much event risk as it isn’t accompanied by a statement, leaving the markets to speculate on the tally until the minutes are revealed on September 17th. The major event risk for the Sterling will come from the PMI manufacturing and services reports. Since, both are expected to slip further into contraction we could see the GBPUSD look to test support at 1.8182 the 7/18/2006 low. Trading at theses historic low levels sets the cable up for a retracement, especially of traders have priced in a rate cut and are disappointed when the BoE disappoints
The British pound started out on a weak note at the start of trading on Sunday, as the currency plunged 200 points versus the greenback following the release of comments by UK Chancellor of the Exchequer Alistair Darling from an interview with the Guardian newspaper.
During the interview, Mr. Darling said that the UK economic conditions “are arguably the worst they've been in 60 years” and that the slowdown may be “more profound and long-lasting than people thought.” Looking at the latest economic data, there’s little reason to doubt Mr. Darling’s dour sentiment. The August reading of the purchasing managers’ index (PMI) for the manufacturing sector reflected a contraction in business activity for the fourth consecutive month, though the index did rise slightly to 45.9 from 44.1. Meanwhile, the Bank of England’s reading of mortgage approvals fell to 33,000 in July, marking the lowest level since record-keeping began in 1999. Overall, there are literally no bright spots on the horizon for the UK economy, but nevertheless, the
Bank of England is widely expected to leave rates unchanged at 5.00 percent on Thursday. However, it is also widely known that the central bank has sought to maintain a hawkish stance against inflation in an effort to keep the public’s expectations in check. Thus, a rate cut may not be on hand this week, but with Credit Suisse overnight index swaps pricing in over 75bps worth of cuts within the next 12 months, it’s simply a matter of time before the Bank Rate comes down.
Regards