Plunging Pound’s Fate Seen Clearer After BOE Meets Post-Brexit
Traders will be watching the Bank of England’s first policy meeting since the Brexit referendum for fresh reasons to sell the pound.
Speculation is building that BOE Governor Mark Carney will use the Thursday gathering to follow up on his pledge to take whatever steps are necessary to spur the economy.
The chances of the central bank cutting interest rates by July 14 have jumped to 74 percent, from 11 percent just before the decision to leave the European Union was announced. While lower borrowing costs can help stoke growth and inflation, they tend to undermine a currency.
“An interest-rate cut could intensify the downward pressure on the pound,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The BOE meeting will clearly set the direction.”
On July 5 — in his third appearance since the June 23 referendum — Carney took steps to spur bank lending, while signaling that rate cuts or more quantitative easing may follow this summer. He warned that some of the risks of Brexit had already started to “crystallize.”
Memories of ’07
That’s no surprise to anyone who’s been watching the pound since the historic vote. A day after that speech, Britain’s currency touched a 31-year low of $1.2798 as the closure of a number of property funds echoed the real-estate tremors at the start of the financial crisis in 2007. Sterling dropped 2.5 percent this week to $1.2938 as of 5 p.m. London time on Friday.
U.K. economists are split on the outcome of the BOE meeting next week, with a slim majority of respondents to a Bloomberg survey predicting a rate cut.
As well as looking for signs of firm action from the central bank, investors will scour the meeting’s minutes for any remarks from policy makers that give clues on how they plan to react to the fallout of Brexit.
“Everybody will be interested in how they see the situation so far, what kind of downside risks have already materialized and what’s yet to come,” said Esther Reichelt, a Frankfurt-based currency strategist at Commerzbank AG. For the pound, “a lot will depend on the signals they are giving.”