The Bank of England and Governor Bailey gave their strongest signal yet that rate cuts are coming, and they may in fact come in quicker than what markets are currently pricing. The member vote was split with 7 electing to hold rates and 2 members, Dhingra and Ramsden electing to cut rates. Governor Bailey cited that key measures of inflation persistence were moderating, but will need to see further evidence of this before cutting rates. So it seems the BoE’s stance is tracking the ECB’s stance more closely and markets have now increased the probability of a June rate cut to 59% from 50%. GBP declined initially off the news but losses were limited due to the data dependency stance from the Bank.
USD declined across the board after initial jobless claims came in higher than expected, and highlighted potential cracks in the US job markets.
*Daily move - against G10 rates at 7:30am, 10.05.24
** Indicative rates - interbank rates at 7:30am, 10.05.24
Given the reference to data dependence, markets will closely monitor upcoming data as well as speeches made by BoE members, before markets feel more confident that an earlier rate cut is coming. But the shift by the BoE today, particularly lowering their inflation forecasts, heightens the possibility of GBP trading lower over coming months, particularly if the data supports the Bank of England’s forecasts. UK job numbers are out on Tuesday 14th May, and CPI numbers are out on Wednesday 22nd May.
GBP has received a bit of a boost this morning with data revealing the economy bounced back stronger than expected from last years recession. The economy grew by 0.4% in March, contributing to 0.6% growth in the whole of the first quarter. BoE members Pill and Dhingra will be speaking today.
Yesterday's weakness of USD following the higher jobless claims was noteworthy. The higher number was modest, yet the sell-off on USD seemed a bit much. Perhaps this reveals how the currency is currently vulnerable to softer data releases. A softer U. of Michigan sentiment number today could add further woes to USD going into the weekend. We also have a host of Fed speakers today.
The pound has been resilient this year and continues to hold its gains in 2024. The higher GDP number today will be supportive of the currency in the short term, but of course we need to be wary of the impact of an earlier rate being actioned by the BoE this year and whether this pushes the currency through the 2024 lows – tested twice this year.
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