Soft data backs BoE rate outlook, sterling slides

Pound sterling weakens on soft economic data, points to support of “higher for longer” BoE view

The British pound continued its decline against the dollar and the euro on Wednesday, following discouraging economic data that reinforces the expectation that the Bank of England will likely keep interest rates unchanged when announcing its policy decision next week.

UK economic data released on Tuesday revealed a labor market showing signs of loosening, and the flash reading of the S&P Global UK Purchasing Managers' Index (PMI) for the services sector in October fell to 49.2, the lowest reading since January and below the crucial 50 threshold that separates growth from contraction.

As of 12:30 GMT on Wednesday, the pound had fallen by 0.3% against the dollar, trading at $1.2121. On Tuesday, it saw a 0.7% decline, marking its most significant one-day drop in over a week.

The euro to dollar rate also saw a 0.1% uptick, with EURGBP trading at 87.23, very close to a 5.5-month low of 87.40 pence per euro reached on the previous Friday.

UK interest rates: Economists say BoE done with hikes

The majority of economists surveyed by Reuters believe that the Bank of England is now finished with its monetary policy tightening and will maintain the Bank Rate at 5.25% on November 2. According to a report by the publication on October 25, money market traders also believe that UK interest rates have peaked, with rate cuts fully priced in by the end of the following year.

Previously, traders had anticipated that rates would peak above 6%, but due to a slowdown in inflation and subdued economic growth, expectations have been scaled back. Headline inflation remained steady at 6.7% last month, after reaching an 41-year high of 11.1% in October 2022. However, with inflation still above the target, analysts suggest that it might be premature to entirely dismiss the possibility of future tightening.

Viraj Patel, global macro strategist at Vanda Research, told Reuters:

"It's obvious there's some slowing momentum. You struggle to paint a bullish picture when you have weak macro and a potentially more dovish BoE."

Pound to dollar forecasts: GBPUSD may find support at 1.20, says ING

According to a long-term pound to dollar forecast issued by Dutch bank ING on October 9, cable, as the GBPUSD currency pair is widely known in forex markets, may find support around the 1.20 mark in case of the BoE ending its rate hike cycle next week:

“The Bank of England surprised some by leaving the Bank Rate unchanged at 5.25% in September. The vote was close however: 5-4. Barring some big upside surprises to the inflation and wage data published on October 17/18th, we think policy will be left unchanged at the Nov 2nd meeting and the cycle will be over.

Investors still price 18bp of further BoE tightening, which suggests sterling can drop a little when this is priced out. But GBP/USD should find support at the lower end of this 1.20-1.30 range.”

Vanda Research's Patel was in broad agreement with ING’s view:

"I'm hesitant to say the BoE is done because they are data dependent and so to make that call you need visibility on what things will look like in three months and that's pretty tricky right now. Based on the data seen so far, however, I don't see them hiking next week."

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