A Report by CYS Global Remit Counterparty Sales & Alliance Unit
The British Pound (GBP) holds a prominent position in global currency markets, drawing significant attention from investors and traders alike. Its performance is intricately linked to a variety of factors, spanning both domestic and global spheres. Economic indicators such as GBP growth, inflation rates, and employment figures serve as key drivers, shaping market sentiment towards the GBP. Furthermore, monetary policy decisions by the Bank of England (BoE) play a crucial role in guiding market expectations and influencing the currency’s value. Beyond domestic considerations, geopolitical events, and broader market sentiments, including trade relations and global economic trends, also exert considerable influence on the GBP’s trajectory.
GBP remains on the defensive
The GBP/USD pair is currently facing downward pressure, hovering around the 1.2430 mark during the early stages of the trading session on Wednesday morning. This decline is attributed to the continued strength of the US Dollar (USD), which has been bolstered by hawkish comments from Federal Reserve (Fed) Chair Jerome Powell and encouraging US Retail Sales data. These factors collectively weigh on the GBP/USD pair, prompting investors to closely monitor the upcoming release of the UK Consumer Price Index (CPI) for further insights into the current market direction.
Powell’s remarks on Tuesday emphasized on the necessity of maintaining a restrictive monetary policy stance for an extended period, casting doubt on the prospects of significant interest rate cuts by the Fed this year. He highlighted that recent economic indicators have failed to instill greater confidence with the Fed, suggesting that achieving such confidence may take longer than initially anticipated. As a result, financial markets have adjusted their expectations for rate cuts, with projections now pointing towards one or two reductions beginning in September. The Fed has steadfastly held its benchmark interest rate with a range of 5.25% to 5.5% since July 2023, further shaping market sentiment.
In contrast, market participants anticipate that the Bank of England (BoE) will implement two interest rate cuts within the year, potentially commencing as early as August or September, preceding actions by the Federal Reserve. This divergence in monetary policy expectations has exerted selling pressure on the Sterling Pound (GBP), creating headwinds for the GBP/USD pairing and contributing to its current defensive stance.
Adding to the narrative, BoE Governor Andrew Bailey has echoed concerns about declining inflation in the UK during Tuesday’s statement. He indicated that policymakers are carefully considering the possibility of interest rate cuts, emphasising the importance of gathering further evidence before initiating such actions. Moreover, Bailey highlighted the potential for differing paths in interest rates between the US and Europe throughout the year, suggesting potential implications for currency markets.
GBP continues to decline on the weak labour market
According to the latest data release from the Office for National Statistics (ONS), the UK unemployment rate rose to 4.2% in February, exceeding market expectations of 4.0% and the previous month’s reading of 3.9%. Meanwhile, average earnings, including bonuses, remained unchanged at 5.6%, while earnings excluding bonuses decreased slightly by 0.1% to 6.0%. These figures provide insights into the current state of the UK labour market, showing a slight increase in unemployment alongside stable wage growth.
Looking ahead, the upcoming UK inflation report for March holds significant importance for the short- to medium-term outlook of the British Pound (GBP). Analysts anticipate a further decline in headline UK inflation from 3.4% in February to 3.1% in March, bringing it closer to the Bank of England’s target of 2%. The BoE closely monitors inflation data and may signal that interest rate cuts could occur sooner than previously expected. The March inflation data will play a crucial role in shaping market sentiments surrounding the GBP and influencing the BoE’s monetary policy decisions in the near future.
Meanwhile, the GBP/USD currency pair continues to face downward pressure as the US Dollar strengthens and the GBP weakens. Wednesday saw the pair break below all three simple moving averages, contributing to negative market sentiment.
UK CPI Preview: Lower inflation expected, boosting likelihood of rate cuts
The Office for National Statistics (ONS) is expected to release the highly anticipated United Kingdom’s (UK) Consumer Price Index (CPI) data on Wednesday, a report that could trigger significant movements in the Sterling Pound. The CPI figures will be closely scrutinized, as they may prompt the BoE to signal an interest rate cut sooner than previously anticipated.
Analysts expect the headline annual UK Consumer Price Index to show a rise of 3.1% in March, slightly lower than the 3.4% increase recorded in February. Despite this moderation, the figure would remain above the BoE’s 2.0% target, albeit at its lowest level since 2021. Similarly, the core CPI inflation is projected to ease to 4.1% year-on-year in March from 4.5% in February, marking its lowest level in over 2 years. The monthly CPI is anticipated to have increased by 0.6% in March.
A key factor contributing to the anticipated easing of inflation is weaker growth in food prices, as indicated by recent data from the British Retail Consortium (BRC). Food inflation fell to 3.7% from 5.0%, while shop prices rose at a slower annual rate of 1.3% in Match compared to 2.5% in February. Additionally, Average Earnings excluding Bonus, a measure of wage inflation, rose by 6.0% year-on-year in February, slightly decelerating from January’s 6.1% growth. However, services inflation is expected to remain elevated at 5.8% year-on-year, although it has moderated from a 6.1% increase in February.
Despite expectations of softer inflation, analysts anticipate that headline inflation may continue to slightly undershoot the BoE’s forecast for March. Weak food and core goods inflation are expected to exert downward pressure on the overall figure. Analysts predict that headline inflation will be likely to remain below target from April until the end of the year.
UK Inflation Surprise
UK Consumer Price Index (CPI) declined in March, albeit to a lesser extent than initially anticipated. The UK headline CPI eased to 3.2% from 3.5% last month, with core CPI dropping from 4.5% to 4.2%. The core measure excludes volatile price effects related to fuel and food to offer a clearer view of general goods prices in the UK. Despite this decline, the month-on-month print remained elevated at 0.6%, matching February’s pace of price increases, due to declines in food prices countered by rising fuel costs.
The Bank of England (BoE) is likely to emphasize the need for data to move closer to the target before considering interest rate cuts. The Sterling Pound (GBP) has held up well against the US Dollar (USD) in Quarter 1, but a late March slide occurred as high UK inflation suggested that the BoE would maintain rates above 5% longer than its peers.
Following the CPI release, GBP/USD rose, benefiting from CPI surpassing expectations. The recent slowdown in the broader GBP/USD decline offered temporary support, but the USD strength, driven by safe-haven demand amid Middle East uncertainty and Fed-ECB policy divergence, may continue to elevate the greenback.
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