UK Pound Drops Amid Dim Growth Outlook and Rate Concerns

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The pound fell against the dollar and the euro on Thursday, a day after data showed a contraction in British activity in August, prompting markets to reduce expectations of further rate hikes from the from the Bank of England.
The pound was at $1.2671, down 0.5% on the day.

Weak activity data on Wednesday, which also showed the weakest growth in producer prices since February 2021, had traders betting that the BoE would not need to hike rates as sharply as expected for bring inflation back to target.

The central bank has raised interest rates 14 times since December 2021, taking them to 5.25%, their highest level in 15 years.

Money market operators still expect the BoE to raise its interest rate to 5.5% next month, but futures now price only a one-in-three chance of rates hitting 6% , compared to more than 50% chance before yesterday’s activity data.

“What the data showed yesterday is that the UK is not isolated in the slowdown in global growth,” said Simon Harvey, head of FX market analysis at Monex Europe.

“Markets are readjusting to the weaker growth profile, taking some bets off the table for the Bank of England’s tightening cycle and that is trickling down,” Harvey added.

A Reuters poll found economists expect the BoE interest rate to peak at 5.50%, down from 5.75% in July.

The pound also lost 0.3% against the euro, with the single currency last buying 85.63 pence.

Chris Turner, global head of markets and regional head of research for the UK and Central and Eastern Europe at ING, expects the euro to gain further ground against the pound this year, the BoE being close to the end of its rate hike cycle.

“We still think the Bank of England will not reach the 60 basis points of tightening still expected by the markets,” said Mr. Turner, “and that EUR/GBP (euro-sterling) could come back more later in the year in the 0.87″ zone.

Traders are now looking ahead to the Federal Reserve’s three-day symposium in Jackson Hole, which kicks off today. BoE Deputy Governor Ben Broadbent could give more clues about the future course of monetary policy when he speaks on Saturday.

Tis article is originally published on zonebourse.com

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