ExchangeRates.org.uk - The British Pound (GBP) stumbled on Wednesday following the latest GDP figures from the UK. Contrary to expectations of a 0.2% growth, the UK economy remained stagnant in July, marking a departure from the 0.2% expansion observed the previous month. In addition, July saw a downturn in British industrial production, which declined by 0.8% instead of the anticipated 0.3% increase. Manufacturing production also took a hit, retreating from a four-month peak by falling 1%, missing predictions of a 0.2% rise. Despite these setbacks, the outlook for the Bank of England’s (BoE) policy direction remains unchanged, according to analysts. They suggest that the current data is unlikely to significantly influence the BoE's ongoing process of policy easing.
Luke Bartholomew, Deputy Chief Economist at abrdn, said: ‘The broader trend remains solid, although it is likely that the underlying pace of growth will slow somewhat over the second half of the year. Certainly, there is no reason yet for the Bank and England to feel it needs to speed up the pace of rate cuts, and we expect the Bank to keep interest rates on hold next week.’
Consequently, the Pound's losses were relatively contained, with GBP posting only modest losses against its major counterparts on Wednesday. The Euro (EUR) exhibited minimal movement against most of its major counterparts on Wednesday, with investors appearing cautious about making significant moves before the European Central Bank’s (ECB) imminent interest rate decision. Due for release on Thursday afternoon, there is widespread expectation that the ECB will implement a 25 basis-point reduction in interest rates.
Michael Field, Strategist at Morningstar said: ‘With 85% of economists polled expecting a 25 basis point rate cut by the ECB, it's safe to say the markets will be disappointed if this doesn’t happen. When expectations are so unified though, generally it’s for a reason. In fact, two reasons that we can clearly identify.’
Given the recent string of disappointing economic indicators from the Eurozone, a confirmed rate cut by the ECB tomorrow could see the single currency weaken against its peers. Looking forward, the pivotal driver for the GBP/EUR exchange rate on Thursday centres on the European Central Bank's (ECB) forthcoming decision on interest rates. The critical question is whether the ECB will cut rates, potentially weakening the euro, or if an unexpected decision to maintain rates could bolster EUR exchange rates. On the GBP front, the absence of significant UK economic data may leave the pound directionless, likely resulting in Sterling trading without a definitive path.
This content was originally published on ExchangeRates.org.uk
