Sterling weakens ahead of UK growth data

Central Bank Speeches

Sterling exchange rates are once again on the back foot following comments made by several monetary policy committee members. Earlier this week, chief economist Huw Pill suggested it was reasonable for the market to expect interest rate cuts from the middle of next year. Higher UK interest rates support the value of sterling by making the currency more attractive to overseas investment. A drop in interest rates would lead to a softer pound.

However, at a conference in Dublin held by the Central Bank of Ireland, Bailey took a more cautious approach and pushed back against the prospect of future rate cuts. He insisted that it was too soon to start talking about easing policy while inflation is higher than the 2% target.

Huw Pill will speak again today so the markets will be looking to digest any comments from him that further speculate on future policy.

European Central Bank president Christine Lagarde speaks later today regarding future EU policy. Like the BoE and Fed, the ECB decided to keep interest rates on hold at their last monetary policy meeting. A suggestion of higher-for-longer interest rates would likely support the value of the euro against its counterparts. The single currency recently gained more than 1.5% against the dollar following poor jobs data which reduced the expectation of further rate hikes in the US.

UK GDP data

Tomorrow morning will see the release of quarterly and yearly GDP (growth) data from the UK. Year-on-year growth is expected to post 0.5% of growth. However, on a quarterly basis the economy is expected to shrink -0.1%. Sterling would benefit from an uptick in growth vs the expectations but could weaken if the economy contracts.

The BoE have said there is a 50% chance of a UK recession. A negative growth reading would increase the probability of a recession and pile pressure on sterling exchange rates.

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