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Pound Sterling: Positive Global Sentiment Underpins Currency, GBP/EUR Hits May Highs

May 22, 2024 - Written by John Cameron


The Pound has made headway during Tuesday despite nerves ahead of the latest UK inflation data.

HSBC commented; "Since the last Monetary Policy Committee (MPC) meeting, it has been well understood that the June rate cut scenario depends on this week's CPI and the next one due June 19."

Expectations of ECB and Bank of Canada June interest rate cuts have helped underpin the Pound in markets, especially with optimism that global economic conditions are improving.

The Pound to Dollar (GBP/USD) exchange rate has held above the 1.2700 level and remained close to 2-month highs.

The Pound to Euro (GBP/EUR) exchange rate has secured a further net advance to May highs around 1.1715.

According to Scotiabank on GBP/USD; “Short-term trends look positive and underlying trend signals are bullish, suggesting spot may be able to push on to test the mid-1.27 area.”

HSBC, however, remains cautious on the Pound; "We maintain GBP-USD is expensive versus what interest differentials imply.”

Goldman Sachs thinks that if the latest inflation data matches market expectations this will count as enough evidence for the Bank of England to begin cutting interest rates in June.

The bank is, however, doubtful that such a move would have a significant impact on the Pound, especially given the strong global influence on the currency and current low volatility.

According to Goldman; “in particular, the currency tends to do relatively well against both USD and EUR in periods when financial conditions ease on the back of lower yields and higher equity prices.”

It added; “we think even if the MPC converges on a June rate cut, it will be only a minor headwind for the currency if it continues to look like foreign policymakers will follow not too far behind.”

The ECB will hold its next meeting on June 6th and is extremely likely that it will cut rates.

The latest UK data was disappointing with the CBI industrial trends orders index sliding to -33 for May from -23 previously and compared with consensus forecasts of -20.

Manufacturers did, however, report that output had increased in the three months to May while the rate of increase in prices had eased.

Weak data would tend to reinforce expectations of a BoE rate cut.

CBI Deputy Chief Economist Anna Leach, commented; “While it’s positive to see that manufacturers’ expectations for higher output volumes have finally been realised in the three months to May, this has been accompanied by a sharp deterioration in order books to close to their weakest since January 2021.”

She added; Manufacturers expect to increase output through the summer months, but any recovery looks set to be fairly gradual, with order books soft and inventory levels relatively high.”

According to Wells Fargo; interest rate decisions will dominate dollar moves and the US currency is likely to maintain a firm short-term tone.

It also noted; “Adding to that outlook is our view that foreign central banks will deliver rate cuts before the Fed. So, as the Fed remains reluctant to prematurely cut rates and international institutions ease in the near future, we believe the dollar can remain on the front foot through September.”

The bank does expect dollar losses during 2025 as the Fed cuts interest rates.

Scotiabank’s Shaun Osborne considers that the dollar overall is on the defensive; “Generally, the USD retains a soft undertone in my opinion, mostly reflecting market repositioning after the USD’s run higher through the early spring. A lot of good news is priced into the USD and investor are paring exposure to book profits.

He added; “USD gains from last week’s low have been limited and take on the form of a bearish technical consolidation on the charts.”
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