Sterling hit a two-week low on Tuesday after a Bank of England policymaker suggested a batch of weak UK data had convinced him monetary policy should be eased immediately, having last week said he needed more evidence of economic weakness first.
While stopping short of openly backing a cut in interest rates or quantitative easing (QE), Martin Weale said in a newspaper interview that last week’s purchasing managers’ data for the services and manufacturing sectors – which pointed to the sharpest contraction since the 2008-09 financial crisis – were “a lot worse” than he had thought.
The BoE surprised markets in July by not cutting the benchmark interest rate from its current historic low of 0.5 percent. But minutes of the decision showed most policymakers expected to back an unspecified package of measures to boost the economy at the central bank’s August meeting.
We do expect further stimulus from the Bank of England.
On top of that we’ve only just started to see the data flow from the post-referendum period, which we think will continue to be quite negative. Together, that will have a negative impact on sterling into early next year.
Sterling has tumbled almost 12 percent against the dollar since Britons voted to leave the European Union last month. Investors are worried that “Brexit” will have negative consequences on the economy and in particular Britain’s already huge current account deficit, which will widen further if investment flows dry up.