The week ahead for GBP

Monday, 07 March 2011 11:30

The Bank of England interest rate announcement will dominate this week.

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GBP EUR is 0.140% higher on the day with 1 GBP = 1.1644 EUR.

GBP USD is 0.412% higher with 1 GBP = 1.6329 USD.

"Following on from last week, the Pound declined against the majority of the major currencies, falling back under 1.17 versus the Euro, after the UK services PMI grew by less than expected in February. The report from the Chartered Institute of Purchasing and Supply showed that services industries expanded modestly last month, after recovering from the fourth quarter contraction," says Adam Solomon, an exchange rate analyst at Tor Fx.

The UK PMI showed a reading of 52.6, despite initial estimates of an increase to 53.5. A reading above 50 indicates expansion in the sector, but the fairly anaemic growth rate in services, which accounts for 75% of gross domestic product, makes it more difficult for the Bank of England to raise interest rates from the current record low of 0.5%.

A strong reading in the report would have increased speculation of a rate increase over the coming months, but some policy makers will be concerned that a hike in borrowing costs at this stage would be "self defeating", in the words of Mervyn King. The Pound will be susceptible to any commentary or economic data that suggests the Bank of England won't raise interest rates, with money markets currently anticipating three quarter point increases this year.

In contrast to the very transparent comments from the ECB chairman Jean-Claude Trichet last week, MPC member Charles Bean delivered a much more ambiguous statement.

He said that inflation may be more persistent than first predicted, but he also warned that there are signs the economy is slowing. Overall, there is likely to be a high degree of uncertainty going into this week's BoE interest rate announcement.

The week ahead for GBP

The Bank of England interest rate announcement will dominate this week, with a fundamental lack of key economic data due for release. Three members of the MPC voted to raise rates last month and if two more members join the chorus for higher interest rates the BoE would have a majority vote for an immediate increase.

Thursday's release of the NIESR estimate for GBP in three months to February may provide some insight into how the economy has performed at the start of 2011. The revised estimate of GDP in the fourth quarter of last year showed that the economy contracted by more than initial estimates and policy makers may collectively wish to wait for the first quarter figures before committing to a rate hike.

Comments from the Bank of England governor Mervyn King will also be watched closely this week for any hints on the direction of policy. Other data of note include January's industrial production and trade data. The producer price index and RICS house price balance also feature and the impact of rising commodity prices should be evident in the latest factory-gate inflation.