Surprisingly poor GDP figures make a UK interest rate cut this week highly likely
Latest insights:
A UK December interest rate cut now looks a near certainty after figures released last week showed the UK economy contracting in the three months to the end of October. The data, from the Office for National Statistics, showed a 0.1% contraction in the pre-budget period, a worse result than markets had anticipated.
Investors think the Bank of England (BoE) will now use an interest rate cut to drive an upturn in economic activity. Its last monetary policy committee meeting of the year is on Thursday, when a rate cut of 0.25% – to 3.75% – now appears all but nailed on.
What that means for the pound and money markets is not certain, but exchange rate fluctuations are likely. The US Federal Reserve (Fed) also cut interest rates last week by a quarter percentage point, to 3.50 – 3.75%, leading the dollar to lose further ground against the euro.
Pound dips after GDP data
The disappointing growth data hit the pound last week, though not significantly. Broad dollar weakness means sterling is still up by over 1.25% against the greenback in the last month. The pound also rallied slightly against the euro, but remains nearly 5.50% down against the EU currency over the last year.
Meanwhile, the euro strengthened to a two-month high against the dollar amid signs of economic resilience in the eurozone. The European Central Bank (ECB) is likely to raise growth projections this week.
The week ahead:
The Bank of England’s interest rate decision will be the main UK focus this week as markets start winding down for Christmas. EU monetary policy decision makers will also meet on Thursday, but are widely expected to keep interest rates unchanged.
In the US, investors can expect a data heavy week as the government catches up on metrics that were delayed by the recent shutdown. In particular, unemployment and labour market statistics, due on Tuesday, may impact the trajectory of the dollar.
