Sterling recovered to around $1.22 this morning, having fallen below $1.21 the previous day, as expectations for an interest rate cut next week faded.
Bank of England Governor Mark Carney prompted the strengthening by saying in a speech the BoE could not ignore the pound’s “fairly substantial” drop since the vote to leave the European Union.
Carney said there were limits to the central bank’s ability to overlook the effect of the steep slide – about 18 percent since the Brexit – on inflation, and it would “undoubtedly” take it into account at its rate-setting meeting next week.
In early September, the BoE said it was likely to cut rates again this year if the economy slowed as it expected. But sterling’s weakness and unexpectedly robust economic data have prompted most to rule out a Nov. 3 cut – around three quarters of the 60 economists polled in the past few days expect rates to stay at 0.25 percent for the rest of the year.
Sterling has regained some ground after (Carney’s) comments, as many saw them as an indication that the BoE will leave policy unchanged…next week.
Further underpinning the pound is the assumption that the economy will not need another shot of monetary stimulus anytime soon. If that were not the case and the BoE had to ease but were unable to for fear of fuelling inflation, the sterling response would have been negative.
Key data on Thursday will be the UK GDP figures released at 9:30am. The expectations are that the economy has slowed and we expect a reading of 0.3% compared to a previous of 0.7%
Sterling could shift if the data is not in line with the expectations.