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The Bank of England faces a crunch rate decision this week (T.Schneider / Sutterstock)
Sterling fell to a six-month low against the US dollar to end last week ahead of an interest rate decision from the Bank of England that looks more intriguing by the minute. Based on current trading, currency markets put the chance of an interest rate cut at around 30%.
However, several prominent institutions lined up to predict the Bank of England would lower interest rates come Thursday lunchtime. Analysts from Barclays and Goldman Sachs predicted a quarter-point cut to 3.75%, but that would still be considered a major shock despite the pound’s weakness.
Why the sudden change in tune? Well, the narrative that inflation is cooling has now taken hold, and when you combine that with sustained weakness in the UK economy and hiring market, there is certainly a case for easing up on the presently restrictive policy.
After the European Central Bank decided to keep rates unchanged last week, a sharp burst of inflation data seemed to vindication their choice. Headline inflation in Italy, France, and the eurozone as a whole fell month-on-month in October.
While Andrew Bailey and co are the headline act of this week, the Reserve Bank of Australia will also make its latest decision tomorrow morning. A second consecutive hold is the expectation.
US manufacturing and services data returns to the menu this week. The University of Michigan’s consumer sentiment survey provides another datapoint in an economy that has been starved of any kind of solid economic news for a month now.
Strong earnings from Apple and Amazon helped the tech sector regain its footing even as anxieties over an asset bubble spread. Apple expects to have a booming Christmas period, while the first signs of a return on Amazon’s massive AI spending were enough to give stock markets a jolt before they packed up.
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GBP: Decision in the balance
Thursday’s interest rate decision now appears to be in the balance, a scenario that would have seemed borderline impossible just weeks ago. Could the Bank be lining up a major shock? It’s certainly possible, which could spell trouble for the pound after another testing week.
GBP/USD: the past year
EUR: Opposing directions
The pound continued to struggle against the euro last week, although a rally on Friday afternoon helped it end proceedings more or less where it had began. Recent dynamics have hardly been helped by the European Central Bank’s serene monetary policy decisions, which are in stark contrast to a fast-changing picture in the UK.
GBP/EUR: the past year
USD: Desperate for data
As the government shutdown continues, it has become impossible to accurately gauge the state of the US economy. That didn’t seem to trouble the US dollar last week, which strengthened to its best level in months against the pound and the euro. However, every day that passes by dataless is another reminder that nobody knows for sure what’s going on beneath the bonnet.
EUR/USD: the past year
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