Monfor Weekly Update

Monfor Weekly Update

GBP has experienced a decline of approximately 1.3% from its recent peak against the US dollar, reaching $1.2857, marking a 7-month high.  Last week the foreign exchange majors were largely influenced by US inflation data.  In addition, although UK wage growth pressures have been easing, they remain relatively high, while UK GDP showed signs of improvement in January.

The Bank of England (BoE) is anticipated to maintain its current interest rate at 5.25% until there are clearer indications of a slowdown in pay growth and services inflation.  The decision from the BoE, scheduled for this Thursday, will be influenced by the latest UK inflation data, particularly regarding services inflation, which surged to 6.5% in January.  The timing of the BoE's first rate cut hinges on this data.  Unless there is a significant downside surprise in inflation, it is expected that the BoE will restate its previous guidance, emphasising the need for sustained restrictive rates.

Currently, the market anticipates a total easing of 60 basis points for 2024, with the initial cut projected for August.  This week is notable for a series of central bank decisions, potentially leading to divergence in the timing and magnitude of monetary easing, thus increasing foreign exchange volatility.

Despite last week's hawkish reassessment of UK rates, the overall hawkish stance of G3 central banks adversely affected the GBP. The expected trajectory of monetary policy among G3 central banks is largely similar, making the extent of anticipated monetary easing a key factor. Increased expectations of rate cuts are conducive to the growth outlook for high beta currencies like the GBP against the USD. Consequently, despite the GBP's recent hawkish repricing, the broader hawkish shift in G3 policy weighed on its performance.

Please note:  The news and information contained on this site should not be interpreted as advice or as a solicitation to offer to convert any currency or as a recommendation to trade.

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