CPI readings crucial to valuing the Pound

Macroeconomic snapshot

The macroeconomics situation of the United Kingdom is mostly indifferent but is likely to improve. This is expected to reduce downward pressure on the Pound’s value.

May meeting of the Bank of England’s, Monetary Policy Committee (MPC)

• The Bank Rate was hiked by 0.25% in May to 4.50%, matching the 0.25% hike in March.

• The next meeting is on Thursday the 22nd of June.

• The hiking cycle has risen as anticipated and is expected to rise a little further. This is likely to lead to higher gilt bond yields which could increase their appeal to investors. This is expected to apply upward support on the pound's value.

GDP growth rate for Q1 2023, preliminary estimate

• GDP in the UK for Q1 remained steady at a 0.1% quarterly expansion since Q4 2022.

• The final Q1 report is due on Friday the 30th of June.

• The economy has grown as anticipated but is expected to grow a bit faster. This is likely to lead to increased stock market prices and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply upward support on the pound’s value.

CPI report for April

• CPI in the UK for April improved a lot to 8.7% annual inflation from 10.1% in March.

• The May report is due on Wednesday the 21st of June.

• CPI has fallen a lot slower than anticipated but is expected to fall much further. This is likely to lead to stabilised interest rates and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply upward support on the pound’s value.

Labour report for April

• Unemployment in the UK for April fell slightly to 3.8% from 3.9% in March.

• The May report is due on Tuesday the 11th of July.

• The labour market has improved better than anticipated but is expected to slightly deteriorate. This is likely to lead to slightly reduced growth and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply indifferent support/pressure on the pound’s value.

Russian invasion of Ukraine

• The war is having a detrimental effect on the global and UK economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty. This is expected to apply downward pressure on the pound’s value.

Brexit

• The UK's decision to leave the European Union (EU) has created a great deal of uncertainty about the future of the UK economy. This uncertainty has made investors less willing to take risks, which has led to a sell-off in risky assets, such as stocks and currencies. The resultant effects are expected to limit upward support on the pound’s value.

Cost of living crisis

• The UK cost of living crisis is having a negative effect on the value of the pound. This is because investors are becoming less confident in the UK economy and are therefore less willing to invest in British assets. This is expected to apply downward pressure on the pound’s value.

Previous three months (March to May)

The Pound has gained value in the past three months from March to May, however it did start to fall from the highest level of 1.26 in May. This weakness can be attributed to a more valuable dollar as investors pricing in interest rates staying higher for longer. This is because the Fed has not made any dovish statements or considered cutting rates after the banking crisis.

Month to date (June)

The pound has gained value through this month having climbed from its low of 1.23 at the start of the month towards 1.28 today. This can be attributed to dollar weakness as the Fed paused hikes, US inflation is falling and a sentiment of disbelief that the Fed will continue to hike this year as was indicated by the updated projections.

Outlook

The events to keep an eye on:

Monday the 19th of June

• US National Holiday Juneteenth.

Tuesday the 20th of June

• FOMC Member Williams Speaks historically neutral regarding rates.

Wednesday the 21st of June

• UK CPI expected to fall to 8.4 from 8.7.

• Fed Chair Powell Testifies historically neutral regarding rates.

• FOMC Member Goolsbee Speaks historically dovish regarding rates.

Thursday the 22nd of June

• Bank of England Monetary Policy Meeting expected to hike by 0.25% to 4.75%.

• Fed Chair Powell Testifies historically neutral regarding rates.

Friday the 23rd of June

• UK Retail Sales expected to have shrunk by -0.2% from 0.5% growth.

• US Services, Manufacturing PMI’s.

CME group 30-day Fed fund futures

• July: rising sentiment of a 0.25% hike, 75% in favour.

• September: slightly falling sentiment of a hold, 70% in favour (20% for a 0.25% cut).

Long Term Value of the Pound Sterling to Steadily Appreciate, US Dollar to Steadily Decline : As the UK economy improves, investors are likely to return. Moves are expected to remain above the three month swing low of 1.18 unless inflation climbs or remains high.

Short Term Value of the Pound Sterling to Remain Steady, US Dollar to Stabilise: As the cost of living crisis continues to bite consumer’s spending power it is unlikely that any short term strength in the pound is to be seen. A significant fall on the inflation reading would also see the value of the pound suffer. Moves are not expected to rally much higher than the month to date swing high of 1.28 unless the UK CPI reading remains stubbornly high.