British pound sterling forecasted to weaken moving forward, UK currency faces hurdle of QIR next Wednesday

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Published on Friday, 03 August 2012 09:59

Written by Sam Coventry

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"We expect the Bank of England’s QIR report Wednesday to build expectations for additional easing, thus be GBP negative and Gilt positive" - John Wraith at Bank of America Merrill Lynch Global Research.

The pound sterling (Currency:GBP) is struggling against high-yielding currencies this morning after it was shown that growth in the UK's huge services sector slowed in July, fuelling fears that the economy will fail to come out of recession in the second half of the year.

The pound euro exchange rate is 0.19 pct lower than at Thursday nights close at 1.2710.


The pound dollar exchange rate is 0.31 pct higher on yesterday at 1.5563.

The pound to Australian dollar is o.24 pct in the red at 1.4786.

The services PMI dropped to 51 from 51.3 in June, its lowest level since December 2010.

Now that all the PMI data is in we can assume the UK economy stagnated in the third quarter. That said PMI data is at odds with official data - PMI suggests the economy grew by 0.1 pct in the second quarter, compared with the ONS estimate that it shrank by 0.7 pct.

All this points to a weaker pound going forward.

Bank of America Merrill Lynch Global Research have this morning advised clients to sell GBP.

"We expect the Bank of England’s QIR report Wednesday to build expectations for additional easing, thus be GBP negative and Gilt positive," says John Wraith at Bank of America Merrill Lynch Global Research who already has his eyes on the next major test for the UK currency.

The Bank of England will publish the August Quarterly Inflation Report (QIR) next Wednesday, 8th August, with significantly lower starting points for both the GDP and CPI profiles than anticipated in May, offset by the expected impact of the additional £50bn of asset purchases announced in July, as well as significantly lower market rate expectations.

Widespread uncertainties continue to dominate the outlook for the UK economy, and Bank of America advise that they would expect the Bank to produce a forecast for CPI at the 2y horizon close to but a little below the 2.00 pct target, with pronounced risk in both directions, but skewed to the downside.

"Such an outturn would keep the market anticipating a high probability of a cut in Bank Rate within the next 6-9 months, and the prospect of additional Gilt purchases being sanctioned in November alive. We think the Bank will be comfortable with the degree of easing anticipated by the market at this stage, as softer market rates contribute to their efforts to boost activity through a variety of policy channels," says Wraith.