Pound Helped by Speculation BOE Will Hold Rates Steady
Money markets are pricing in a 6% chance of a rate cut at the Bank of England’s meeting on Jan. 30.
The pound rebounded from its new year hangover, on speculation the Bank of England could avoid an imminent cut to interest rates following a post-election economic boost.
Sterling advanced against all major peers and halted its losing streak since the start of 2020, after the U.K.’s services sector unexpectedly showed signs of strengthening. This may ease pressure on the central bank to loosen monetary policy and stimulate growth, according to Capital Economics Ltd. and Pantheon Macroeconomics Ltd.
“Today’s release suggests that there could be a post-election bounce in the data over the next few months as confidence improves,” said Thomas Pugh, U.K. economist at Capital Economics in London. “If this is confirmed in January and February then it should be enough to convince the bank to keep rates at 0.75%.”
Money markets are pricing in a 6% chance of a rate cut at the Bank of England’s meeting on Jan. 30, down from as much as 85% in October.
The pound has slipped since its best quarter in a decade in late 2019 on optimism the Conservatives would win the December election and avoid an immediate no-deal exit from the European Union. Euphoria following their victory gave way to concerns London won’t seal a trade agreement with Brussels by the time the Brexit transition period expires at the end of 2020, weighing on the currency.
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Samuel Tombs, U.K. economist at Pantheon Macroeconomics in Newcastle, said the latest services data suggested “the lifting of the threats of a no-deal Brexit in January and a business-hostile Labour government has triggered a recovery in activity.” Improving data is significantly weakening the case for the central bank to cut rates over the coming months, he said.
Some analysts still think lingering uncertainty over the U.K.’s future trade relationship with the EU may be enough to force the central bank into action, and money markets now see a 63% chance of a rate cut in December.
Mikael Olai Milhoj, senior analyst at Danske Bank A/S, said that while policy makers may await more data before making their decision, the U.K.’s sputtering economy will force officials into voting for a cut by May. He said that while the services boost gave some relief to the economy, it signals zero growth in the last quarter -- lower than the Bank of England’s own projections.
“We still think the economy will remain under pressure,” he said. “The underlying uncertainty for companies remain unchanged, not least taking Boris Johnson’s transition comments into account.”
The pound rose as much as 0.7% to $1.3175, helped by a wider trend for a weaker dollar. Sterling pared gains to $1.3143 at 1:26 p.m. London time. It strengthened by 0.2% to 85.19 pence per euro.
To contact the reporter on this story: Greg Ritchie in London at gritchie10@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, William Shaw, Michael Hunter
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