- According to the performance in the forex market, the British Pound has shown more flexibility against the Euro and the US Dollar, with the probability of interest rate cuts in June reaching 80%.
- Recently, the British Pound had been positioned as the best-performing currency in 2024 under observation, with increasing probabilities of interest rate cuts in June.
- However, losses are likely to be limited, according to Nomura Bank.
The price of the GBP/USD currency pair continues to remain under stable bearish momentum around the level of 1.2635.
Overall, after the recent guidance from the Bank of England, financial markets now see an 80% chance that June will be the start date, with the full cut priced in by August. In this regard, Andrew Goodwin, chief UK economist at Oxford Economics, says: "We continue to call for the first rate cut to come in June, with two further 25bp cuts to take the bank rate to 4.5% by the end of this year." Added, "The inflation path now looks benign and the need to maintain a very tight policy stance to guard against second-round effects looks less compelling."
According to forex trading platforms, the pound fell 0.44% against the euro, its biggest one-day fall since December, after two members of the bank's monetary policy committee voted in favor of additional rate hikes and joined the majority in opting to hold rates. Also, the bank said there was room to cut rates without risking stoking inflation, suggesting that rate cuts could begin before the 2.0% target is reached sustainably.
For his part, Robert Wood, chief UK economist at Pantheon Macroeconomics, says: "We agree that the probability of a move in June has increased... so we stick with our call for a first cut in June, followed by September and December."
The pound-dollar exchange rate fell by 1.44% in the 24 hours that followed the decision, and the size of this move represents testimony to the doubts that the Fed will choose to cut US interest rates after the Bank of England, which will provide additional interest rate support to the US dollar. In this regard, George Buckley, an economist at Nomura Bank, says: “The Bank of England has laid the foundation for its willingness to reduce the interest rate, if necessary, and with the market situation, we believe that the downward risks to the pound sterling in the near term are increasing.” He adds, “We believe that the balance of risks tends to move the bank more quickly than we think (i.e. June instead of August).”
Overall, sterling was the best performing G10 currency in 2024 ahead of last Thursday's decision, on expectations that the bank would be one of the last major global central banks to cut rates due to expectations that core UK inflation will be slower to return to the 2.0% target than elsewhere. Meanwhile, there are signs that inflationary pressures are on track to reach the target, with April likely to see inflation hit 2.0%. Wage price pressures - a key determinant of domestic inflation - have also softened significantly, and economists say they could fall further.
However, Nomura analysts say the weakness in sterling is likely to be limited and is unlikely to enter a downtrend. According to analysts, "For sterling to enter a weak trend, we would need more evidence that the UK economy is weakening, but we don't have strong evidence of that."
Furthermore, downside risks against the euro are particularly limited, as the Bank and the European Central Bank are likely to cut rates simultaneously and embark on a synchronized cutting cycle. This would only serve to entrench the recent low volatility range seen in GBP/EUR. Generally, there are no calendar risks for EUR and GBP this week, but euro zone inflation figures next week are worth watching. If inflation falls, we are confident that GBP/EUR could rebound towards the top of the 2024 range.
GBPUSD Expectations and Analysis Today:
Overall, trading during the short week remains bearish for the performance of the GBP/USD pair. Attempts to rebound are still weak and likely to remain so until markets and investors react to the announcement of the preferred inflation reading by the US Federal Reserve this week. According to the performance on the daily chart attached, the support at 1.2600 will remain important for bears to move strongly downward if factors supporting the US dollar's gains persist. From support levels at 1.2565 and 1.2450, technical indicators will move towards levels strongly saturated with selling pressure. On the other hand, there will be no opportunity for an upward rebound without a re-break of the resistance at 1.2775.
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