Home Daily Commentaries UK Cuts interest rates to 5% from 16-year high

UK Cuts interest rates to 5% from 16-year high

Conor Fleming
Written by
Conor Fleming

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor spearheads initiatives to encourage businesses in Germany, Switzerland, and Austria to hedge their foreign currency risks with OFX.

| Friday 2 August, 2024

Daily Currency Update

The German economy contracted by 0.1% in the second quarter of this year, falling short of expectations for a slight expansion (+0.1%). The ECB Governing Council has indicated the need to closely monitor upcoming Eurozone data, as several peripheral countries are exceeding the budget deficit limits set by the ECB.

In the UK, the Bank of England cut its base lending rate by 0.25 percentage points, bringing it down to 5.0%—the first rate cut in sixteen years. Economists suggest that the UK's struggle with weak growth and high inflation might be easing, and political turmoil is also subsiding. However, the Bank of England emphasized that any further rate adjustments will be contingent on future data.

In the US, the Institute for Supply Management (ISM) index fell to its lowest level since November of last year, dropping below the key threshold of 50, signaling economic contraction. Additionally, the number of Americans filing for unemployment benefits rose to an 11-month high, intensifying speculation about a potential rate cut by the Federal Reserve in September. It is worth noting that the increase in unemployment claims may be seasonal.

Key Movers

Markets are anticipating two rate cuts from the ECB, totaling 50 basis points, by year-end. European manufacturing continues to struggle, and recent inflation data showed a rise of 2.6%, exceeding market expectations. This inflation data has introduced some uncertainty about whether the ECB will proceed with another rate cut this summer. This shift in expectations could potentially offer some support to the euro.

Bank of England Governor Andrew Bailey stated that the increase in the UK's minimum wage did not influence their decision to cut interest rates yesterday. He noted that the inflation trajectory is now closer to their 2% target compared to the median forecast. Although the Pound initially fell following the rate cut announcement, it later rebounded as markets grew optimistic that the Bank of England's proactive stance might bolster future growth for the UK economy.

Today, the US will release its employment data, with Non-Farm Payrolls due at lunchtime. While recent data has indicated a slowdown in the US economy, the Dollar remains strong amid escalating geopolitical tensions. Additionally, Fed Chair Jerome Powell emphasized that further confidence in inflation moving toward the 2% target is needed before considering additional interest rate cuts.

Expected Ranges

  • GBP/USD: 1.2710 - 1.2775 ▲
  • GBP/EUR: 1.1760 - 1.1795 ▲
  • GBP/AUD: 1.9530 - 1.9585 ▲
  • EUR/USD: 1.0785 - 1.0840 ▲

Written by

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor first embarked on his financial career journey as a trainee dealer in BNP Paribas in the early 90s. His professional journey also took him to New York, where he assumed the role of Head of Sales with an Irish bank for a few years. During his tenure at both banks, he was invited to several interviews on Irish television to discuss market turbulence, the factors driving volatility and insights into what could be expected as events unfolded.