Sterling weakens as UK economy slows

RationalFX : Sterling lost ground against EUR and USD on Monday as expectations of an interest rate cut grew, following a slowdown in growth for the UK economy. ..

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The latest UK GDP growth reading year on year showed the economy grew by 0.6%, its weakest rate of expansion since June 2012.

Monday’s poor data release is of particular importance for GBP, as UK data remains under the microscope following recent comments from Bank of England policymakers. Policymakers have commented that UK data will be monitored to determine the next appropriate policy move.

Bank of England Governor Mark Carney and Policymaker Tenreyro were joined by Vlieghe as the latest policymaker to back a rate cut. Vlieghe stated that he would vote to cut the cost of borrowing for the first time since 2016 if economic data continues to disappoint this month.

Vlieghe added that ‘the next few meetings are absolutely live’ and that ‘an imminent and significant improvement in UK data is needed to justify waiting a bit longer’. This follows Tenreyro’s comments on Friday, where she told a Westminster conference she could support a rate cut in the coming months. Tenreyro added that she would support a cut in the ‘near term’ should uncertainty over a post-Brexit UK-EU trade deal persist.

This is an important development for the GBP as policymakers voted 7-2 to keep rates on hold at the last MPC meeting in December, with only Haskell and Saunders voting to support a rate cut. Should Vlieghe and Tenreyro join Haskell and Saunders, they would only be 1 member short of a majority for a cut. Money markets are now pricing a cut by the end of January at 50% and an 85% probability of a cut by May.

Key Announcements

13:30 – USD – Consumer Price Index ex Food & Energy (YoY) (Dec) – expected to meet expectations of 0.2%.

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