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Pound Drops As BoE Lifts Key Rate; Warns Of Recession

pound jun20 04aug22 lt

The pound weakened against its major counterparts in the European session on Thursday, after the Bank of England raised its benchmark rate by half-a-percentage point and said that the economy is set to fall into a recession in the fourth quarter.

The monetary policy committee of the central bank voted 8-1 to lift the bank rate by 50 basis points to 1.75 percent, the highest rate since December 2008. This was the sixth consecutive rate hike.

Most members said a 0.5 percentage point increase in interest rate was warranted at this meeting. For these members, a more forceful policy action was justified.

A majority of members assessed that a faster pace of policy tightening at this meeting would help to bring inflation back to the 2 percent target sustainably in the medium term, and to reduce the risks of a more extended and costly tightening cycle later.

The MPC said the policy was not on a pre-set path. The scale, pace and timing of any further changes in Bank Rate would reflect the Committee's assessment of the economic outlook and inflationary pressures.

The BoE said that the latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The economy is now expected to enter recession from the fourth quarter of this year, it added.

Survey results from S&P Global showed that the UK construction sector contracted for the first time in one-and-a-half-years in July.

The construction Purchasing Managers' Index posted 48.9 in July, down from 52.6 in June. The reading was expected to fall moderately to 52.0.

The currency advanced against its major rivals in the Asian session, except the euro.

The pound dropped to a 2-day low of 161.15 against the yen, from a 1-week high of 163.97 it touched at 7 am ET. The pair was valued at 162.45 when it ended trading on Wednesday. The pound is seen finding support around the 156.00 mark.

The pound fell to a 6-day low of 1.2065 against the greenback, following a 2-day high of 1.2215 seen at 7 am ET. The pound-greenback pair had closed yesterday's trading session at 1.2144. The pound is likely to challenge support near the 1.18 mark.

The pound touched a 3-day low of 1.1583 against the franc, after rising to more than a 2-week high of 1.1718 at 7 am ET. At Wednesday's close, the pair was worth 1.1657. The pound may face support around the 1.12 region, if it falls again.

The pound depreciated to a 9-day low of 0.8429 against the euro, down from a session's high of 0.8342 it logged at 7 am ET. The pound had ended yesterday's trading session at 0.8366 against the euro. Further fall in the pound may find support around the 0.86 mark.

Data from Destatis showed that German factory orders declined less than expected in June as the fall in foreign demand was partially offset by the improvement in domestic orders.

Factory orders decreased 0.4 percent on a monthly basis in June, after a revised 0.2 percent drop in May. Nonetheless, this was slower than the economists' forecast of -0.8 percent.

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