GBP
The pound dropped to a fresh year low at the end of last week’s trading sessions versus the USD as the Deputy Governor of the Bank of England, Dave Ramsden, highlighted easing price pressures in the UK. This could suggest that he has become more open to the possibility of an interest rate cut sooner rather than later in the UK.
Ramsden appeared more relaxed on upcoming changes to interest rates in the UK during his speech in Washington on Friday evening, highlighting the fall in Consumer Price Indexes released earlier in the week and the trend of reducing price inflation for the UK that the CPI data has shown steadily since Autumn 2023. This, in his opinion, will see UK inflation heading back towards the Bank of England’s targeted 2pc range. The reiteration holds particular weight, given comments from Bank Governor Andrew Bailey earlier in the week, who also stated that there is strong evidence that UK inflation is falling. This disinflation (the rate on inflation falls but prices still rise, but at a slower pace) is the key focus for policymakers at present.
As usual though, the picture is anything but clear at the moment on when the Bank of England are likely to react to falling inflation, with some commentators suggesting that expectation for an interest rate cut in the UK has actually been delayed until August or September this year.
GBP’s lost ground coincides with these shifting expectations around interest rates, posting a fresh year low for GBP/USD and going back to levels not seen against the euro since early in the year. This GBP sell was exaggerated somewhat by the usual weekend illiquidity, as only the US markets remained open during Ramsden’s speech. However, it does demonstrate a reshift in expectations for a UK interest rate cut in June, with some expectation that the BoE may act sooner and begin to cut rates in their May meeting.
This week, PMI data was released across Europe, the US, and the UK. Although the results were mixed, broadly speaking, data from the UK was better than expected, with solid services results offsetting slightly weaker readings from manufacturing and painting a positive picture overall in the composite readings. The UK Services PMI, which was higher than expected, moved from 53.1 to 54.9.
Following the releases, GBP recovered against both USD and EUR, with the pound mostly recovering against the dollar due to low US PMI readings, following year-to-date lows seen earlier in the week.
The GBP/EUR recovery could be movement back into rangebound territory or driven by euro weakness as EUR/USD, the most globally traded pair, continued to drop.
Additionally, yesterday, the Bank of England’s Chief Economist Huw Pill cautioned against ‘being lulled into a false sense of security’ as inflation seems set to ‘approach or even fall below’ its 2% target this spring. His words added to the ongoing narrative from the Bank of England that interest rate cuts might still be some way off. Markets now expect only two quarter point rate cuts from the central bank this year, down from six at the beginning of 2024.
EUR
The Euro was benefitting from a weaker pound, due to speculation around interest rate cuts for the Bank of England earlier in the week. Last week we saw EUR/USD in 1.06 levels, which is the lowest the pairing had been since 2nd November 2023. This week, rates have recovered over 1.07, in part due to market correction as the pairing has lost 3 cents this month.
The European Central Bank has also helped to stabilise expectations around interest rate changes in the Eurozone, providing more stability to the currency as a whole.
With firming expectations of a change in monetary policy in June’s meeting (barring any wild changes in economic conditions in the Zone), there is little of note in terms of data releases this week for the EU. PMI releases were broadly positive for the Eurozone as well, seeing a similar outcome to the UK, with positive services data offsetting the slightly weaker manufacturing data. The overall result was the Eurozone’s composite PMI returning to expansionary territory with a reading of 51.4 against the forecasted 50.7, with key contributions from Germany.
None of the information contained in this document constitutes, nor should be construed as, financial advice.
