Pound Sterling Retreats From Intra-Day Highs, Interest Rate Expectations Dominate
The Pound to Dollar (GBP/USD) exchange rate secured a net gain to 1.2480 before a retreat to around 1.2460.
The Pound to Euro (GBP/EUR) exchange rate hit 1-month highs at 1.1735 before a retreat to 1.1710.
Interest rate expectations across major economies remained a key element driving currencies.
Markets are confident that the ECB will cut interest rates ahead of the Bank of England.
ING expects the Pound to maintain a firm tone; “For now, the divergence between ECB and the BoE can keep EUR/GBP capped, and we forecast the pair to stay closer to 0.8500 than 0.8600 in the next month.
This implies GBP/EUR closer to 1.1765 rather than 1.1630.
Market expectations of BoE and Federal Reserve cuts have both been pushed back.
UK markets focussed on inflation and Bank of England policy during the session.
The headline year-on-year inflation rate declined to 3.2% from 3.4% and the lowest reading since September 2021, but slightly above consensus forecasts of 3.1%.
There was a similar picture for the core inflation rate with the annual rate retreating to 4.2% from 4.5% and just above expectations of 4.1%.
This was the lowest core reading since the end of 2021.
The goods inflation rate declined further to 0.8% from 1.1% while the services-sector rate edged lower to 6.0% from 6.1%.
According to TD Securities; “Overall, this is not what the BoE wants to see, in particular after the stronger than expected wage numbers out yesterday.”
Matthew Ryan, head of market strategy at financial services firm Ebury commented; “While both the main and core measures of inflation eased to their lowest levels since late 2021, the continued stickiness in services inflation, in particular, may elicit a cautious approach among Monetary Policy Committee members.”
He added; “We still see a realistic possibility of looser policy in the summer, although today’s data has somewhat put a spanner in the works.”
MUFG considers that the BoE should be cautious over cutting rates, but noted that there is still a high degree of uncertainty.
It added; “Softening labour demand and a further rise in the unemployment rate could make it more uncomfortable for the BoE to wait much longer before cutting rates. In these circumstances, we expect the pound to weaken further against the US dollar in the near-term although it may eke out further modest gains against the euro.”
The dollar has maintained a firm tone in global markets with confidence in Fed interest rate cuts continuing to slide
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