British Pound: Political risks and BoE stance – RaboResearch

FXStreet Insights Team FXStreet

RaboResearch Global Economics & Markets discusses recent UK CPI and labour data and their implications for the Pound, EUR/GBP and GBP/USD. The bank notes softer UK inflation, signs of spare capacity in the labour market and tighter financial conditions. It highlights BoE caution, elevated market rates and UK political risks, expecting EUR/GBP near 0.87 and GBP/USD dips towards 1.33 over 1–3 months.

BoE caution and UK political uncertainty

"The pound has already recouped most of the losses made vs. the EUR on this morning’s release of softer than expected May UK CPI inflation data. The headline rate at 2.8% y/y, held steady in line with the previous month’s figure while the core rate ticked only slightly higher to 2.6% y/y. The data indicates that this year’s peak in UK inflation could be lower than has been expected."

"We continue to expect EUR/GBP to creep higher to the 0.87 area on a 1-to-3-month view."

"Despite the weakness in the UK labour data, the market was quick to price in a fairly aggressive spate of tightening from the BoE at the start of the Iran war. Some of this has now been reversed, but the movement in market rates has tightened monetary conditions. This in itself may allow the MPC to sit on its hands for longer, or at least to allow policymakers to wait for more news regarding the direction of oil prices."

"The focus will instead be on both the minutes and the voting pattern of policymakers as the market looks for clues as to whether the MPC could even sidestep a rate hike altogether this year. That said, even policy doves may conclude that in order to avoid an official rate hike, market rates may need to stay elevated for now. This raises the risk that the Bank continues to talk tough over the summer."

"This risk alone, is likely to unsettle the pound. We see risk of dips in cable back towards the 1.33 area on a 1-to-3 month view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

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