Brexit Fallout to Force Bank of England to Cut Rates

BoE to Ease as slow UK growth and EU exit darken economic outlook

The pound rally that started with the sense of stability about its political leadership is losing steam ahead of the Bank of England (BoE) rate statement. Expectations are divided on the actions of the U.K. central bank on Thursday it can hold its benchmark interest rate unchanged at this time, but Governor Mark Carney has warned markets that rate cut is coming this summer after the negative effects that Brexit has imposed on the economy. The BoE will reassess its monetary policy summary, rate statement and minutes from the meeting on Thursday, July 14 at 7:00 am EDT.

The BoE Governor warned markets and U.K. voters of the perils that could be unleashed by voting Leave. His forecasts have not been far off the mark with the pound tumbling to 31 years lows and recovering slightly by the new prime minister Theresa May running unopposed in the conservative party. The biggest question mark around the central bank policy decision is not what to do, but when. A rate cut is imminent but the BoE could wait until next meeting in August 4, which is a super Thursday with the release of the quarterly inflation report on top of the usual announcements.

The Brexit vote has the potential to push the United Kingdom back into a recession and that is why quantitative easing and other monetary policy tools have been discussed to avoid that fate. The urgency of the situation as PM May has said that the referendum vote cannot be reversed could make the BoE more aggressive and cut in July rather than in August.

The GBP/USD lost 0.614 percent in the last 24 hours. The pair is trading at 1.3182 ahead of the Bank of England (BoE) rate statement on Thursday. The impact of the decision to leave the European Union was to contained within British borders. Capital markets globally were shocked and risk aversion took hold of investors. Stock markets have rebounded, but currencies are still awaiting fundamental data to fully price in the new post-Brexit world.

British stocks have surpassed April’s levels as political stability and a promise of rates remaining low have driven investors to UK companies benefited by the softer pound.

Aside from the BoE rate announcement markets will be looking at Chinese GDP data later in the day. The week will end with more U.S. data to make a case for the recovery of the American economy. Retail sales and inflation data will be released on Friday at 8:30 am EDT.

Market events to watch this week:

Thursday, July 14
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
8:30am USD PPI m/m
8:30am USD Unemployment Claims
10:00pm CNY GDP q/y
10:00pm CNY Industrial Production y/y
Friday, July 15
8:00am GBP BOE Gov Carney Speaks
8:30am CAD Manufacturing Sales m/m
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza