By Nick Harrison
Thursday saw the Bank of England keep their interest rate on hold at 5.25%. As per previous votes, 2 members viewed a cut in the rate necessary, while the other 7 members all voted to hold. The decision was widely expected by investors and while there was an initial small reaction in the market to the downside, the Pound regained its strength against the EUR. The next Monetary Policy Committee meeting is now scheduled for August 1st and this is when the MPC is expected to make it’s first rate cut since the 5.25% level that has stayed with us now for nearly a year.
The Pound has continued to perform strongly against the Euro and is still quoting around a 2 year high – this is down to two key reasons:
Firstly – The European Central Bank have been the first of the major central banks to cut their rate. If you recall – The ECB cut their rate from 4.5% to 4.25% earlier this month and this has therefore put the single currency under pressure, particularly against the Pound. Further cuts by the ECB are also forecasted, so this will continue to weigh on the Euro.
Secondly – The UK CPI (inflation) figure was released on Wednesday morning and came in line with the Bank of England’s target of 2%. While this has now paved the way for an interest rate cut in the UK, the fact that the Bank Of England didn’t have a kneejerk reaction to this by cutting the rate this week has buoyed the Pound. Concerns are still emerging from the inflation data that rising costs such as cinema tickets, restaurants and holidays are still faster than expected, despite the recently published fall in food prices, so this is an area of focus for the Bank to consider as they weigh up their options.
Today, the UK’s Retail Sales figure was released at 7am and came in at +2.9% following a fall in April of 1.8%. More encouraging news for the UK economy then, and we have seen the Pound strengthen again against the Euro this morning.
Flash Manufacturing and Services data was released in the Eurozone earlier this morning and all figures came in lower than expected. This signals further potential weakness for the Euro ahead of ongoing interest rate cuts by the ECB.
We also have the Services & Manufacturing data released in the UK & US today, so let’s see if the market reacts to these releases as the week comes to a close.
Next week is relatively light on economic data, so investors will be keen to see events developing in the UK and France as their elections start to hot up.
Key Market Releases For Next Week
Tuesday 3pm – US Consumer Confidence
Thursday 10.30am – Bank Of England Governor Bailey speaks
Thursday 1.30pm – US Final GDP figure
Thursday 1.30pm – US Unemployment claims
Friday 1.30pm – US Core PCE Price Index
Friday 3.00pm – US Consumer Sentiment