Sterling fell as reports suggesting that the UK’s manufacturing and services industries contracted in July heightened speculation that the Bank of England will cut interest rates as soon as next month.
Sterling dropped against 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 UK’s decision to leave the EU.
The Markit survey of purchasing managers — executives who make spending decisions at 1,250 big UK firms — fell by the most in its 20-year history. “July saw a dramatic deterioration in the economy,” said Chris Williamson, Markit’s chief economist.
“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 the Canadian Imperial Bank of Commerce in London.
Financial futures bets showed an 88% chance the Bank of England will cut its key interest rate from a record-low 0.5% when it decides on its next move early next month. The pound dropped by almost 1% to 84.10 pence against the euro and also fell 1% to $1.3104.
Evidence that Britain’s economy is shrinking has led new UK chancellor Philip Hammond to pledge a loosening of purse strings if the weakness endures. The Bank of England has also been clear that easing monetary policy may be necessary.
The Markit survey was consistent with an economy contracting 0.4% in the third quarter, contrasting with an actual reading of plus 0.4% in the first quarter.
The readout, little more than a week after new prime minister Theresa May formed her government, indicates the challenge she faces to maintain market and investor confidence as she embarks on what promise to be long and difficult Brexit talks.
Mr Hammond played down the purchasing manager surveys as a measure of sentiment, not of “hard activity”, but said he would act to support the economy when he announces his budget plans later in the year.
“Exactly what that framework looks like will depend on the state of the economy at the time of the Autumn (budget) statement.
“The data that we see over the next three months or so will be crucially important in shaping our response,” he told Sky News during a visit to China.
Mr Hammond is attending a weekend meeting of finance ministers from the Group of 20 economies at which counterparts will be keen to hear how Britain can pull off a smooth exit from the EU while minimising the damage to the global economy.
The Markit PMIs, which give an early indication of how GDP is likely to perform, suggest the UK economy is shrinking faster than at any time since the aftermath of the global financial crisis.
It showed the services sector — one of the few British growth drivers — has been hit especially hard by Brexit, with orders plunging and confidence crumbling.
Sterling’s post-referendum plunge to its lowest level against the dollar since the mid-1980s has helped manufacturing exports expand at the fastest pace in almost two years, Markit said.
But the pound’s fall also pushed up costs for energy and raw material at the fastest pace in five years.
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