News & analysis

A combination of factors have merged to create an ugly inflation cocktail in the UK. Price growth remains worryingly high despite 490bp of monetary tightening from the BoE to date. Even more so when the pickup in May inflation numbers seemingly forced the BoE to reaccelerate policy tightening in June. It is into this context that the latest round of data releases has dropped, causing a reassessment of expectations for BoE policy tightening by markets once again. June inflation printed soft across the board, breaking a run of four upside surprises in a row, and jobs data pointed to labour market pressures beginning to ease. The resultant selloff in Bank Rate expectations and closing rate differentials has pulled sterling significantly lower against the dollar in recent days, reversing the strength seen following a soft US CPI reading which initially saw cable break to a 15-month high. This latest round of UK data has certainly opened the door for the BoE to decelerate the pace of hiking again, in line with market speculation. But uncertainty remains elevated, with analyst views split, and markets seeing the upcoming meeting as a coin toss between 25 and 50bp of policy tightening. Ultimately, we think a smaller rate hike is more likely, with a further rate hike in September, before a more sustained cooling in inflation and wage pressures allows the BoE to hold rates constant for the remainder of the year. Given this outlook, sterling looks expensive to us at current levels, especially given the currency’s sensitivity to yield spreads. Further out though, structural supply issues suggest that Bank Rate remains above estimates of the neutral level for some time, which should be supportive of some GBP strength through 2024.

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Author: 

Nick Rees, FX Market Analyst

 

 

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