Currency analysts at Wells Fargo foresee that the Bank of England (BoE) will take action to reduce interest rates in August. This forecast positions the BoE ahead of the Federal Reserve in adjusting monetary policy. The primary impact of this anticipated move is expected to be a depreciation of the pound-to-dollar exchange rate (GBP/USD), potentially reaching a level of 1.25. This decision is projected to create a downward pressure on the value of the British pound against the U.S. dollar.
Nonetheless, analysts at Wells Fargo believe that the U.S. dollar's strength will be curtailed by the slowing pace of the U.S. economy. This economic deceleration could mitigate the dollar's strength and may result in an increase in the GBP/USD rate to around 1.29 by the end of 2025, coinciding with an expected rate cut by the Federal Reserve at that time.
Wells Fargo has also forecasted that the Federal Reserve will likely lower interest rates during its meeting in September. However, this prediction carries a degree of uncertainty, suggesting that the rate cut might be delayed beyond September. On the other hand, the baseline scenario for the Bank of England involves a rate cut during their August meeting.
This anticipated move by the BoE is likely to weaken the British pound, primarily due to the differing yield rates compared to other currencies. The divergence in monetary policy and interest rates between the BoE and other central banks, like the Federal Reserve, plays a significant role in currency valuations and investor behavior.
The economic prospects of both the U.S. and Europe are pivotal in this context, potentially marking a crucial turning point. Since the onset of the Covid-19 pandemic, the United States has demonstrated stronger economic growth compared to Europe. However, Wells Fargo's analysis suggests that the momentum of U.S. growth is currently waning. This slowdown could reduce the supporting factors for the dollar over the medium term.
According to Wells Fargo, the dollar is expected to peak in value during the third quarter of the year. Following this peak, the dollar is projected to gradually weaken, influenced by the broader economic conditions and monetary policies.
The upcoming UK inflation data, scheduled for release this week, will be critical in determining market reactions and future monetary policy. This data will provide essential insights into whether there will be increased selling pressure on the British pound in global markets.
Additionally, it will influence investors' expectations regarding a potential rate cut by the Bank of England in June. Inflation figures are closely watched by market participants as they directly impact central bank policies and currency valuations.
MUFG has emphasized the importance of the upcoming UK consumer price report in shaping market expectations for interest rates and the pound's value. The bank anticipates a significant drop in inflation, bringing it closer to the BoE's target of 2%. This expected decline is attributed largely to substantial reductions in energy prices, which have been a major contributor to inflation. The report will be a key factor in determining the BoE's future actions and the overall economic outlook for the UK.
Recent comments from the Bank of England have suggested a potential rate cut in June if the forthcoming data supports such a move. The state of the UK labor market is another crucial factor that will influence the BoE's decisions. A weakening labor market could prompt the central bank to reduce rates to stimulate economic activity. The interplay between economic data, labor market conditions, and monetary policy decisions will be critical in shaping the pound's medium-term outlook.
Recently, the pound-to-euro exchange rate (GBP/EUR) has seen a significant increase, reaching two-week highs slightly above 1.1685. MUFG analysts believe that the pound could maintain its strength against the euro in the short term, supported by favorable global risk conditions. These conditions include investor sentiment, economic data, and broader market trends that influence currency movements.
Despite the current strength of the pound against the euro, MUFG continues to predict a decline in the GBP/EUR exchange rate to below 1.15 once the Bank of England implements interest rate cuts. The bank's experts maintain their recommendation to sell this currency pair, targeting a level of 1.15. This forecast is based on the anticipated impact of the BoE's rate cuts and the resulting changes in market dynamics.
23.05.2024
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