Pound weakens significantly following Bank of England rate cut.

GBP – The pound might stay under pressure in the near term, but a “hawkish” cut from the Bank of England could help it reclaim its status as an outperformer. The Pound to Euro exchange rate fell below 1.18 and is on course to erase all its July gains after the Bank cut interest rates by 25 basis points. The Pound to Dollar exchange rate meanwhile fell a full per cent to 1.2712. Governor Andrew Bailey said the MPC will be “careful not to cut interest rates too quickly or too much.” This will limit the downside in UK rate expectations and underpin the Pound once the position clear-out has happened. “In our view the BoE delivered a hawkish cut. The decision was characterised as a “slight reduction” in the degree of policy restrictiveness. Even if the Bank of England cuts again in 2024, the UK will continue commanding an elevated interest rate relative to most G10 economies, boosting the appeal of Sterling-denominated assets and Sterling itself.

USD – The US Dollar may advance against its peers due to increased risk aversion. Recent manufacturing and labour market data have erected a complex situation involving an economic slowdown in the US and increased expectations for a Federal Reserve rate cut. If the economic downturn becomes too severe, it could negatively impact market sentiment, rendering any rate cuts from the Fed irrelevant. The FedWatch Tool shows that traders are fully anticipating a 25-basis point rate cut on September 18. Markets are likely to closely watch the upcoming July US Nonfarm Payrolls and Average Hourly Earnings data, set to be released later in the US, for insights into the US labour market.

EUR – In Europe, EUR/USD edged marginally higher to 1.0845, after data showed that consumers in the eurozone stopped reducing their inflation expectations in June after four consecutive monthly falls. The ECB’s Consumer Expectations Survey showed the median consumer expected inflation to average 2.8% over the next 12 months, stable from May after a steady fall from 3.3% in January. The ECB cut interest rates in June and is widely expected to do so again in September, but the policymakers would undoubtedly prefer these expectations to continue to fall as they loosen monetary policy.

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