FOREX NEWS: Pound could test 2016 lows if interest rates cut more than expected

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A currency exchange specialist at forex brokers TorFX looks at the factors driving the pound’s exchange rate this week.

The Pound to Euro (GBP/EUR) exchange rate has spent this week trending in a comparatively narrow range, with the pairing fluctuating between lows of 1.1834 and highs of 1.1985.

While the Euro has been supported by a succession of better-than-expected ecostats, the Pound has been pressured by conflicting commentary regarding the Bank of England’s (BoE) likely approach to fiscal stimulus ahead of next week’s hotly-anticipated interest rate decision.

In light of the UK’s last batch of PMI reports (which yielded rather dire results) economists and investors are largely expecting a rate cut to take place next week, but the severity of the cut is the subject of some debate. Before the end of the week BoE official David Blanchflower put the Pound under additional strain when he implied that the central bank could even put interest rates into negative territory in order to shore up the domestic economy.

Eurozone data also supported the Euro, with estimated Eurozone inflation for July printing at 0.2% on the year. The core figure held at 0.9% rather than dipping to 0.8% as expected.

Other Eurozone news revealed a slowing in growth in the second quarter, although the annual rate came in slightly higher than projected.

Looking ahead to next week, the GBP/EUR exchange rate is liable to experience significant volatility in the wake of the Bank of England’s (BoE) interest rate decision.

If the central bank does cut rates the Pound is likely to fall. However, as a rate cut of 0.25% has been priced into the market to a certain extent, it would take a more significant shift to push GBP down to its 2016 lows of 1.16.

Other economic data with the potential to cause Pound Euro volatility includes the UK’s final manufacturing, construction and services PMI, Eurozone retail sales figures, the European Central Bank’s economic bulletin and the BoE inflation report.

If the Eurozone continues showing signs of resilience post-Brexit GBP/EUR will remain pressured with a neutral/negative outlook.

This article is written by a foreign-currency broker working for TorFX, a forex broker established in 2004 to provide foreign exchange and international payments to both individuals and companies. TorFX is authorised by the Financial Conduct Authority under the Payment Service Regulations 2009 for the provision of payment services. Their FCA number is 517320. To verify their authorisation, you can visit the Financial Services Register and search the register using their FCA number. SPI is not responsible for the opinions of guest contributors.