Today EURO Currency Rate

Rate Cuts This Year
Bias for This Meeting: No Change
The Bank of England is expected to leave rates steady on Thursday at 5.00 percent – the lowest since December 2006 – for the fourth consecutive month. Indeed, all of the 60 economists polled by Bloomberg News anticipate such a decision. The rate announcement will come at 7:00 EDT but since the Monetary Policy Committee is anticipated to leave rates unchanged, they are unlikely to issue a monetary policy statement which should leave the market’s reaction to the news somewhat muted.
What are the fundamental factors that the MPC will be taking into account? Inflation pressures in the UK have built up significantly on the back of rocketing commodity prices, as CPI jumped to an annualized pace of 3.8 percent in June. Furthermore, the latest BRC Shop Price numbers for July suggest that consumer price growth accelerated even more. Rising costs are weighing heavily on consumer sentiment, especially as jobless claims jump and home prices continue to freefall. This has translated into lackluster retail sales, which plunged 3.9 percent in June alone, and a contraction in service sector business activity for the third consecutive month. Likewise, the July PMI reading for the manufacturing sector also reflected contraction for the third month in a row, while output has fallen negative in five of the past seven months. The persistent gains in measures of consumer prices should keep the Bank of England’s MPC concerned about inflation risks, but perpetual doves like David Blanchflower are sure to focus more on potential for a UK recession.
How will the Markets Respond to the News? Currently, overnight index swaps are pricing in almost 50bps worth of rate cuts within the next 12 months, which is part of the reason why the British pound has taken such a heavy hit versus the US dollar in recent weeks. However, once traders see that the Bank of England has chosen to, in fact, leave the Bank Rate unchanged at this meeting, the markets may reduce those rate cut expectations. Thus, there is potential for GBP/USD to rise on Thursday. On the other hand, if the Bank of England unexpectedly decreases the Bank Rate to 4.75 percent, or surprisingly publishes a Monetary Policy Statement that focuses on dour credit conditions and downside risks to growth, speculation of additional rate cuts will surely mount and weigh heavily on the British pound. Nevertheless, the odds of this happening are very slim, and as a result, we hold a bullish bias for the British pound on Thursday.