Following a sunny (in parts) UK bank holiday weekend and significant losses for the ruling Conservative party in local elections, GBP has remained resilient, kicking off the week with strength against the USD, though early signs suggest demand may be waning.  The upcoming monetary policy meeting of the Bank of England (BoE) on Thursday holds the spotlight, with analysts and investors debating the likelihood of a rate cut in either June or August.

Market dynamics, particularly in the US, leaning towards a hawkish policy stance, have influenced recent trends, which haven't been entirely favourable for GBP’s pro-cyclical nature.  Following the March BoE meeting, expectations for rate cuts totalled nearly three 25 basis point reductions by year-end.  Presently, only one cut is fully priced in, with slightly over a 50% chance of a second. However, after a dovish Federal Reserve meeting and a softer US jobs report last week, attention shifted back to the increasing odds of Fed rate cuts in 2024.  This led to a narrowing of US-UK yield spreads, allowing GBP/USD to climb for the second consecutive week, now up over 2% from its 5-month low near $1.23.

While the BoE is anticipated to maintain interest rates this week, uncertainty looms over whether it will signal a potential pivot as early as June, despite services inflation and wage growth slightly surpassing previous forecasts.

BoE Governor Andrew Bailey recently underscored the differing inflation outlooks between the US and UK, suggesting a rate cut could be on the horizon by summer.  This hints at possible downgrades to inflation projections and further dovish adjustments in forward guidance.  Such developments might dampen the pound's recent upward momentum.

Nonetheless, the broader market sentiment towards rate cuts by major central banks, including the G3, is likely to provide support for pro-cyclical currencies like GBP.