Pound Reacts to Interest Rate Hold

EURGBP Fails to Hold the 0.8700 Level Ahead of Data

The British pound handed back its gains to the euro and US dollar over the course of Thursday. This is following the Bank of England’s interest rate hold and “neutral” outlook for the next year. It’s not completely out of the realm of possibility that interest rates could go up or down next year- but if there’s an orderly Brexit which results in an investment boost and a rise in sterling, then the rebound may prompt interest rate hikes. By the end of today, we should know more about whether the UK will leave the EU and enter the transition period on 31st January 2020.

MPC Does Little to Inspire Sterling

Yesterday’s meeting of the Bank of England’s Monetary Policy Committee did little to inspire sterling as it decided to retain interest rates. The decision was welcomed by the markets, but there had been concerns that they were close to cutting rates. The pound had slipped against major rivals on Thursday afternoon, after starting to make small gains in the morning.

It’s entirely possible that the Monetary Policy Committee decided to not take drastic action so soon after last week’s general election and ahead of the parliamentary vote on Brexit. A cut to interest rates is still possible next year if economic activity over the November-January time doesn’t improve.

Global Growth Slow in 2019

Global growth has slowed down over recent years because of political uncertainties such as Brexit, as well as protectionist policies. However, if the Prime Minister’s withdrawal agreement is ratified by Parliament, this severely reduces the risk of a “no deal” Brexit. Odds of an orderly exit of the EU and entry into new trading agreements will increase. The Bank of England forecast growth for the final quarter of 0.1%.

Moreover, if global growth doesn’t stabilise in the first quarter of 2020 and there is no clear Brexit path, we could see cuts in rates and a further loss of investment in the UK. However, in addition to an orderly Brexit, there are other global actions which might make a difference. If US President Donald Trump secures a “phase one” trade deal with China, global growth might stabilise.

However, as 2019 might have been the year of Brexit (or one of many), 2020 will be the year of the US election. With Donald Trump’s impeachment and it being unclear who the Democrat nominee will be, who knows what will happen.

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