The pound continues to a see a volatile week in the run up to tomorrows Bank of England interest rate decision where there is a very high chance the Bank of England will look to cut interest rates. In fact the futures markets are pricing in a 98% chance that there will be a rate cut tomorrow which speaks volumes.
This morning we have UK services sector data which could create some market movement considering it is the engine room of the British economy. Manufacturing and construction have disappointed badly this week although the expectation for services is still to show expansion in the sector. This could see a short term rally rally if the outlook is not all doom and gloom.
What would a UK interest rate cut mean for the pound?
An interest rate cut usually has the effect of weakening the currency concerned so there is likely to be some sterling weakness if the rate cut is made. This could be good news for anyone selling Euros looking for the optimum rates to sell. However because of the pressure on this meeting and the global expectation that this rate cut will almost definitely happen then the market reaction may not be as strong as some may be hoping for.
It will all depend in my view whether or not there is any reference or offer of Quantitative Easing (QE). Any mention of QE could see a sharper fall in the price of sterling. Similarly, a rate cut of 0.5% would also make a considerable difference although I struggle to see the Bank doing this. Bank of England Governor Mark Carney has previously demonstrated that he is not keen on negative interest rates for example and he has done a good job to date in keeping rates low at 0.5% leaving some room to manoeuvre if required.
I think we’ll see a rate cut of 0.25% and some mention of QE which should see the pound weaken. Sellers may wish to position themselves ready for the announcement. Clients buying Euros could see some weaker prices on the horizon.
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