Pound Tumbles as PMI Data Fuel Speculation of Rate Cut by BOE

Be Prepared for Sterling Weakness Later on, Says Turner
  • Composite index falls to seven-year low, Markit Economics says
  • Futures show 87% chance of interest-rate cut next month

The pound fell as reports suggesting the U.K.’s manufacturing and services industries contracted in July heightened speculation the Bank of England will cut interest rates as soon as next month.

Sterling weakened versus all of its 16 major peers on the purchasing managers’ surveys, which were the first major economic data to give an insight into the fallout from the U.K.’s decision to leave the European Union. Markit Economics said its composite gauge covering both sectors dropped to a seven-year low and signaled a contraction.

“The capitulation in service-sector sentiment” suggests “a fairly sharp deterioration in the economic conditions in the wake of Brexit vote,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “That’s going to have an impact on the way the market will perceive the likely actions from the Bank of England.”

Futures showed an 87 percent chance the BOE will cut its key interest rate from a record-low 0.5 percent on Aug. 4, compared with odds of 52 percent after the central bank’s July 14 policy announcement.

The pound dropped 1.1 percent to $1.3082 as of 4:23 p.m. London time, reversing a weekly gain, and weakened 0.7 percent to 83.87 pence per euro.

CIBC’s Stretch forecasts sterling will drop to $1.25 by the end of September.

Markit said its composite index fell to the lowest since April 2009, well below the level which divides expansion from contraction and lower than the median forecast in a Bloomberg survey of analysts. The gauges for services, the biggest part of the economy, and manufacturing output also shrank.

The data came in a week when inflation and labor-market reports covering the period before the referendum mostly exceeded analyst expectations.

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