The British pound appreciated versus nearly every other major currency, except the New Zealand dollar, helping to push GBP/USD up for a test of 1.6500. UK economic data was better than anticipated, as Markit Economics released their Purchasing Managers’ Index (PMI) for the UK manufacturing sector, which rose for the third straight month to 45.4 in May from 43.1. While the index remains below 50, signaling a further contraction in business activity, the steady improvements may signal broader improvements for the UK economy.
On Thursday, the Bank of England is expected to leave rates unchanged for the third straight month at an all-time low of 0.50 percent. Based on the BOE’s last policy statement and the minutes from the meeting, we know that the central bank expanded their quantitative easing (QE) program by 50 billion pounds to 125 billion pounds (which happened to be by a unanimous vote), that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. The minutes also revealed that some members thought that “a case could be made for a larger stimulus,” but the high uncertainty of QE led them to believe that there was “no pressing need for the larger extension” at that point. Ultimately, how the British pound responds will likely depend on the BOE’s QE stance. Signs that the BOE may increase their gilt purchases could weigh heavily on the British pound, especially against the euro, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency, though the markets are just as likely to show no reaction in this case.
[B]Related Article: British Pound Weekly Trading Forecast[/B]