The GBP/USD exchange rate has recently experienced notable declines, influenced by a combination of the British pound's inherent weakness and the relative strength of the U.S. dollar. HSBC analysts predict that the U.S. dollar will continue to strengthen, influenced by significant changes in market expectations regarding the scale of future interest rate cuts by the Federal Reserve.
Additionally, current bond yield levels suggest conditions that are conducive to a gradual increase in the value of the USD. Furthermore, geopolitical tensions and prevalent risk-averse sentiments in global markets could amplify the dollar's strength, although these factors tend to be less predictable and stable. In this environment, the Bank of England's rhetoric indicating a likely upcoming reduction in interest rates is exerting further downward pressure on the pound.
The forthcoming May meeting of the Bank of England is anticipated to be a critical event, with potential implications for interest rate policies, including a possible cut in June. Currently, the market anticipates a conservative reduction of just 10 basis points, reflecting a cautious approach by monetary policymakers. Reflecting on broader economic trends, there is an expectation that more substantial interest rate reductions could be implemented by the end of the year, which would likely lead to a further weakening of the British pound against other major currencies.
The recent downturn in the GBP/USD exchange rate is attributed more to the robust performance of the U.S. dollar rather than significant economic shifts within the UK. In contrast, the exchange rate between the euro and the pound (EUR/GBP) has remained relatively stable, maintaining a consistent range, as highlighted by HSBC analysts. This observation underscores the unique pressures facing the British pound, predominantly influenced by the strength of the dollar rather than domestic economic indicators.
HSBC analysts note that the sustained strength of the U.S. dollar is likely to continue exerting downward pressure on the GBP/USD pair, although this trend may proceed at a more gradual pace over the next month. There is also a possibility for the pound to weaken independently as financial markets adjust their expectations concerning the Bank of England’s schedule for easing monetary policy. This adjustment could reflect a broader reassessment of the UK's economic outlook and monetary policy trajectory in response to ongoing economic data.
Investors' cautious attitude can be attributed to recent economic data emerging from the UK. Despite a decrease in inflation in March, the reduction was smaller than expected, and inflation within the service sector remains high at an annual rate of 6.0%. These figures suggest persistent inflationary pressures that could complicate the Bank of England’s monetary policy decisions.
UK labor market data also points to a deceleration in wage growth, although it has not slowed as much as some had predicted. The ongoing robustness of wage increases, particularly in the private sector, keeps the Bank of England vigilant about potential inflationary risks, as higher wages can lead to increased spending and, consequently, higher prices.
From the perspective of inflation, the current less dovish stance of the Bank of England appears to be driven by recent spikes in energy prices, which have led markets to revise downwards their expectations regarding the scope and speed of monetary policy easing. However, both inflation and wage growth rates are showing signs of slowing, a trend that is expected to continue into the foreseeable future.
Updated economic forecasts by HSBC project that consumer price index (CPI) inflation will stand at 2.0% year-over-year in April, decreasing further to 1.5% in May. Core inflation, which excludes volatile items such as food and energy, is also expected to decline from 3.8% in March to 2.3% in May, indicating a steady progression towards the disinflation targeted by the Bank of England.
Regarding overall economic activity, while there have been encouraging indicators like rising PMI indices and consumer confidence, the actual data reflects a more subdued level of economic activity across the UK. This suggests that despite positive sentiments, the real economy is not expanding at an accelerated pace.
Preliminary GDP data for the UK for the first quarter of 2024 indicates modest economic growth, with an increase of 0.4% quarter-over-quarter. This data suggests that the UK's economic recovery is progressing slowly but remains stable, with no signs of significant acceleration or downturn in the near term.
Finally, recent comments from Governor Andrew Bailey of the Bank of England highlight his confidence in the ongoing disinflation process, despite the economy achieving full employment. His remarks suggest that the Bank may have sufficient leeway to reduce interest rates further without triggering undue inflationary pressures, aiming to sustain economic growth while managing price stability.
28.04.2024
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