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British Pound Extends Losses on Gloomy Economic Data, Points to Steady Bank of England Rates

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The British pound continued its decline on Wednesday following the release of discouraging economic data, which reinforced the belief that the Bank of England (BoE) will maintain interest rates at their current level in its forthcoming policy decision. On Tuesday, the UK labour market showed signs of weakening, while the S&P Global UK Purchasing Managers’ Index (PMI) for the services sector dropped to 49.2 in October, marking its lowest reading since January and falling below the 50 threshold that separates growth from contraction.

Viraj Patel, a global macro strategist at Vanda Research, noted that there is evident deceleration in momentum and that it is difficult to paint an optimistic picture amidst weak macroeconomic conditions and the possibility of a more dovish stance from the BoE. As of 0916 GMT, the pound had fallen by 0.2% against the dollar to $1.2132. This comes after a 0.7% drop on Tuesday, representing the largest single-day decline in over a week. Sterling also slipped by 0.1% to 87.21 pence per euro, nearing its 5-1/2 month low of 87.40 pence per euro from last Friday.

Most economists surveyed by Reuters anticipate that the BoE will leave the Bank Rate at 5.25% on November 2, signalling the end of any further tightening of monetary policy. Money market traders similarly believe that UK rates have reached their peak, with rate cuts expected to occur by the end of next year. Previously, traders had anticipated rates peaking above 6%, but reduced inflation and sluggish growth led to a scaling back of expectations.

Although headline inflation remained steady at 6.7% last month, following its peak of 11.1% in October 2022, analysts caution against fully ruling out future tightening as inflation remains above target. Patel of Vanda Research expressed hesitancy in definitively declaring that the BoE is finished with rate hikes, as the central bank’s decisions are dependent on data and the ability to forecast the economic landscape three months ahead. Given the current data, however, Patel does not anticipate a rate hike in the upcoming week.

The decline in the pound reflects growing concerns about the UK economy and its future trajectory. Investors are closely monitoring economic indicators and the BoE’s policy decisions for any signs of stability or potential risks. The uncertainty surrounding Brexit and its impact on the economy continue to contribute to market volatility. As the BoE’s policy decision approaches, all eyes will be on any signals from the central bank regarding its stance on interest rates and its assessment of the overall economic conditions in the UK.

More detail via Investing.com UK here… ( Image via Investing.com UK )

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