Sterling weak as BoE faces 'unenviable dilemma' over rates

This week has been an unusually quiet one in the UK, lacking any major economic data releases or headlines of note.

No news is good news as they say, but sterling, however, still looks on course to end the month lower against practically every other major currency, perhaps aside from only the Japanese yen, as investors grow increasingly concerned about the fragile state of Britain’s public finances and the outlook for the UK economy.

Interestingly enough, the UK’s economic surprise index (courtesy of Citibank) has now dropped below both of its US and Euro Area equivalents for the first time since early-April. With no major data releases out today, market participants will already be turning their attention to next Thursday’s Bank of England rate announcement.

We think that another rate cut is highly likely, although the MPC faces an unenviable dilemma, as it attempts to balance a stagnant economy and jobs market with high and rising inflation.

This could elicit a three-way split vote among the MPC, and the committee will again likely stress that future cuts will be both gradual and careful - more from us on this topic on Monday.