After a strong rally in the middle of the week, the pound weakened on Friday afternoon despite stronger than expected PMI data. Sterling rallied initially but then moved lower, possibly because some believe that an interest rate cut will still go ahead this week. The markets are currently pricing in roughly a 60% chance of a rate cut.
Composite PMI beat expectations and moved into expansion territory, rising to a 16-month high of 52.4. This reflects a release in pent-up demand following the election result in December, which provided increased clarity over Brexit.
This week, the markets look ahead to the Bank of England’s interest rate decision on Thursday. Following the positive PMI data, it’s thought that the chances of a rate cut look lower. A speech from Governor Mark Carney may reveal more about the BoE’s intentions for the coming months.
At the end of this week, the UK is due to leave the European Union. EU leaders signed the withdrawal deal at the end of last week and this Wednesday, the European Parliament is expected to vote it through. As of 11pm on Friday, the UK will enter a Brexit transition period, which is due to come to a close at the end of this year.
