Many Predicted that the British pound would surge after the resounding win by Boris Johnson’s conservative party in the recent UK elections which has paved the way for the UK to leave the European Union on January 31st and let the country get back to some type of economic stability that has been thrown into chaos with the years of uncertainty surrounding Brexit.
But the reality is the British pound has been under pressure ever since the election as the market digests the damage caused by Brexit and has now left people wondering just how long it will take the economy to get back on track.
Any sudden rate cuts by the Bank of England are not priced into the Sterling as of now and with Governor Mark Carney noting last week that rate cuts will surely follow if there are any signs that the British economy is under pressure.
He noted the BOE has the ammunition to deliver 250 basis points of easing in response to a downturn in the economy even though the current interest rate in the UK sits at 0.75 percent.
The next few economic news releases are crucial for the British pound and any sign of weakness will see rate cut bets rise and as a result a weaker pound.
Some believe a rate cut is sure to be delivered in the next 2 weeks which will come as surprise to many and drive the pound lower.
"The likelihood is the UK economy records a contraction in Q4," says Richard Grace, head of FX strategy at Commonwealth Bank of Australia.
"Given the sluggishness in the economy and the transitional headwinds of the Brexit process, we believe the UK economy requires both monetary and fiscal stimulus. We believe the Bank of England will cut rates by 25bp on 30 January. "We believe GBP will depreciate to the 200-day moving-average of 1.2691. GBP/USD is particularly sensitive to UK-US interest rate differentials.”He added.
Today’s release of the latest inflation figures from the UK as well as Friday's retail sales numbers will be the economic drivers and depending on the numbers may well be the decisive factors in a rate cut from the BOE