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Bank of England odds on to cut interest rate to record low on Thursday

Bank of England odds on to cut interest rate to record low on Thursday

Worse than expected UK Manufacturing PMI data yesterday saw Sterling rapidly decline against the Dollar, where it fell to 1.3163, and against the Euro to 1.1785. The Manufacturing figure of 48.2 highlighted a steeper decline than the “Flash” PMI data released last week indicated.

Sterling has recovered this morning ahead of Construction PMI data despite a general expectation of a further contraction from 46.0 to 44.2. The UK Federation of Master Builders State of Trade Survey released yesterday stated that, in the three months to June, bosses of construction SMEs were predicting higher material prices post-Brexit. Not only are material prices increasing, but the lower value of the Pound means that inflation will likely gather pace.

Anticipation of Thursday’s Bank of England (BoE) interest rate decision will continue to drive Sterling throughout the day today. Following yesterday’s poor manufacturing PMI data, futures markets are now indicating a 98.1% probability of a Monetary Policy Committee vote in favour of cutting rates to a record low of 0.25%. There is also talk of the BoE extending its quantitative easing programme with Funding for Lending Schemes. Either policy decision will likely cause a fall in the value of Sterling.

Yesterday saw the Dollar recoup some of the losses it sustained during last week which saw the worst trading in three months. This strengthening was caused by weaker than expected data from the UK. The gains were not fully maintained, however, as weaker than expected ISM Manufacturing PMI data from the States showed a fall to 52.6. EURUSD maintained around 1.1170 throughout the day yesterday but has pushed through the 1.1200 threshold this morning.

Later today, US inflation figures gauged by Personal Consumption Expenditure will be published; this is the Federal Open Market Committee’s (FOMC) leading inflation indicator. Personal Income/Spending will join the inflation figures, putting the Dollar back into focus ahead of Friday’s Nonfarm payrolls data. It is worth noting that the FOMC wants to inflation to actually progress toward the 2% target, not just show progress in projections, before the next rate hike. A poor inflation figure today could therefore cut the chances of a September rate hike.

The Euro continued to strengthen versus the Pound during yesterday’s European trading session as it made gains of up to 0.3%. The single currency enjoyed positive data; the Markit manufacturing figures for July beat expectations by 0.1, coming in at 52. The Euro will look to continue its positive run of form as we have the Eurozone producer price index figures due later on today.

Overnight the Reserve Bank of Australia reduced interest rates to a record low, cutting its cash rate from 1.75% to 1.5%. The move was was widely expected after a recent run of weak inflation numbers. The bank’s board hopes that the further cut will boost the labour market and economic growth.

Data to watch: GBP 9.30am PMI construction (July) , EUR 10am Producer price index (June), USD 1.30pm Personal income (June), Core Personal Consumption Expenditure (June).

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