Pound Exchange Rates Consolidate Ahead Of Bank Of England Policy Decision (2024)

Pound Sterling Consolidates Ahead of Bank of England Policy Decision

Pound Sterling (GBP) edged higher after the latest UK inflation release, although overall moves were limited given that the data was in line with market expectations.

There was also caution ahead of Thursday’s Bank of England monetary policy decision while the Euro stabilised in global markets as immediate political concerns abated.

The Pound to Euro (GBP/EUR) exchange rate settled with a small net gain to 1.1840 from 1.1830, but below intra-day highs at 1.1860.

The Pound to Dollar (GBP/USD) exchange rate settled around 1.2720 from 1.2740 highs with risk conditions relatively positive.

There were no major US developments during the day with New York markets closed for the Juneteenth holiday.

The latest UK inflation data was in line with consensus forecasts with the headline rate declining to 2.0% from 2.3%, the lowest reading since July 2021, while the core rate retreated to 3.5% from 3.9%.

Although the services-sector inflation rate retreated to 5.7% from 5.9% it remained above the Bank of England forecast.

There are strong expectations that the Bank of England will hold interest rates at 5.25% at this week’s policy meeting with markets pricing in only a 5% chance of a cut.

Many investment banks do expect the BoE to act in August, although markets are pricing in less than a 40% chance of a cut.

This will leave the Pound vulnerable if expectations of an August cut build after the latest BoE guidance.

Ruth Gregory, deputy chief economist at Capital Economics commented; "For now, we are sticking with our forecast that the bank will first cut interest rates from 5.25% in August, although that relies on better news on services CPI inflation and wage growth in the coming months."

Bank of America expects that the BoE will cut rates in August. It commented; “By then, we will know the identity of the new UK Government, and in all likelihood a new set of challenges for the BoE to consider including the prospect of a post-election Budget.

On Thursday’s decision it added; “We expect a 7-2 vote to keep rates unchanged, with two votes for a cut. The guidance is likely to stay unchanged with a continued focus on forthcoming data points to evaluate whether risks from inflation persistence are receding.”

The Euro secured tentative net gains in markets.

MUFG notes that the French bond market the overall FX market move has been limited despite selling in French bonds.

The bank notes a report from Politico that the National Rally (RN) appears to have shifted one of its key policies with a move not to withdraw immediately from NATO.

It also notes a slightly less hostile attitude towards the EU.

According to MUFG; “The RN leadership will be well aware that there has been a direct correlation between the growing support for RN and the softening of much of the extreme policies in relation to EU membership. That could encourage further shifts in policy going forward.”

MUFG added; “Still, an important explanation of the return of some stability to the markets is likely the consensus view that RN will be constrained given the expected hung parliament outcome.”

It did, however warn; “If there is any sense of that view changing in the coming days or if RN do better than expected in the 1st round on 30th June, we would still expect the political risk premium to increase.”

The European Commission started disciplinary proceedings on Wednesday against France, Italy and five other EU member states for taking up excessive new debt, in breach of EU rules.

According to ING; “What shouldn’t help the mood in European markets today is the EU Commission’s announcement of which countries will face the excessive deficit procedure.