Yesterday saw the publication of the Gross Domestic Product (GDP) numbers in the three months up to November, and the UK economy shrank by .3%. This has caused sterling to drop below 1.17 against the euro and 1.30 against the dollar. Analysts note that this could be building expectations for the Bank of England to cut interest rates, given comments from outgoing Bank of England Governor Mark Carney and several members of the Bank’s Monetary Policy Committee (MPC).
Euro and Dollar Strengthen Against Pound
GDP data released yesterday showed that the UK economy contracted 0.3% in November. Additionally, manufacturing production also dropped by 1.7%, over 1% more than predicted. This worrying data has caused concerns that interest rates will be cut on 0.25 points from their 0.75% level. In turn, sterling slumped.
If interest rates are cut, then we can expect the pound to drop in value. Last week, Governor Mark Carney gave a speech noting that the Bank of England would be ready to issue a “prompt” response to weakness in the UK economy. Normally, when a Central Bank reduces interest rates, the currency it issues tends to lose value. The markets won’t be completely surprised about the interest rate cut, but it will definitely be earlier than expected in 2020.
Over the last week, the pound has lost 0.6% of its value against the euro, and 1.3% against the US dollar. Two members of the MPC voted for a cut to interest rates at their meeting late last year, and since then, two others have indicated they would support them.
Optimism High for 2020
Whilst the messaging coming from the Bank of England seems to be that the UK economy has slowed, this was back in November, before the General Election and at a time of deep political uncertainty. Boris Johnson’s large majority brought reassurances to the markets and sterling, as his victory has meant that the UK will be leaving the EU on 31st January and entering a transitional period. His win also meant that Jeremy Corbyn’s left-wing policies, which many businesses feared, had been averted.
For more information on Euro exchange rates and for assistance in making transfers, then please contact me, James Lovick, at [email protected]