Last week witnessed a retreat of the Pound Sterling, reflecting investor anticipation of the Bank of England signalling an imminent interest rate cut, a move which was subsequently confirmed during Thursday's policy update.

The Bank has articulated its intention to carefully assess the next two wage and inflation releases before determining the suitability of a rate cut in June. Consequently, if Tuesday's crucial wage figures from the ONS indicate a weaker-than-expected outcome, we should anticipate a resurgence of GBP weakness in the days ahead.

As market sentiment increasingly leans towards the likelihood of a June rate cut, GBP/EUR could experience further downside. Currently, market-derived expectations for a June rate cut stand at 45%, leaving considerable room for recalibration that could exert pressure on the exchange rate.

However, should earnings growth surpass the anticipated 5.3% year-on-year figure, we might witness a notable rebound in Pound-Euro towards the 1.17 mark in the near term.

Examining the charts, GBP/EUR finds support just above the 200-day moving average at 1.1618. Furthermore, downward momentum in GBP/EUR has somewhat abated, partly due to Sterling's post-GDP recovery on Friday. These technical signals hint at the emergence of support levels, implying a higher threshold for further weakness going forward.

Already positioned below its 2024 comfort zone, the exchange rate is poised for a potential 'mean reversion' in the upcoming days, contingent upon data releases. However, we do not anticipate the attainment of 2024 highs in the near future, given the market's requirement for convincing evidence that a June rate hike is off the table. Such evidence hinges significantly on forthcoming inflation data.

The impending inflation release in two weeks carries substantial weight, as any shortfall could tilt the probability of a June hike beyond the 50/50 mark, consequently pressuring Sterling as the month draws to a close.

It's crucial to note that the labour market and inflation figures for June will precede the Bank of England's decision, underscoring the pivotal role of forthcoming data in addressing uncertainties surrounding a June hike.

The Bank of England (BoE) is anticipated to maintain the Bank Rate at 5.25% today, aligning with both consensus and current market expectations. The likelihood of a rate cut in either June or August is currently uncertain, thus any indication of a dovish stance increasing the chances of a June cut could potentially weaken the pound.

GBP/USD remains below the $1.25 mark, while GBP/EUR stays above €1.16 as traders anticipate the "Super Thursday" meeting, which includes the BoE Monetary Policy Report revealing updated economic projections. It is anticipated that the BoE will revise its medium-term inflation outlook downwards, considering the disinflationary trend resembling that of Europe more than the US. Additionally, the MPC vote split may lean towards a more dovish stance, possibly with another policymaker, such as Ramsden, aligning with Dhingra in voting for a rate cut. Such a scenario would elevate the likelihood of a June cut, making relative rates unfavorable for the pound's value. Speculative traders have been positioning for a weaker pound, evidenced by the increase in GBP short positions, the highest since January 2023.

Although GBP/USD overnight implied volatility remains relatively stable, EUR/GBP overnight implied volatility surged to 8.6%, marking the highest level in three months. Option skews indicate a preference for topside, implying sterling might face increased downward pressure against the euro in response to a dovish tilt from the BoE today.

Yesterday, despite a decrease in US Treasury yields, the US dollar strengthened as markets analysed mixed signals from US policymakers and economic data regarding the Federal Reserve's interest rate trajectory. Neel Kashkari, President of the Minneapolis Fed, hinted at the possibility of the Fed refraining from rate cuts this year due to persistent inflation, even suggesting a potential rate hike.

At the start of the year, there was enthusiasm about the anticipated magnitude of Fed rate cuts in 2024. However, markets may have overcorrected, with some estimating a 25% chance of no cuts this year. Powell's cautious remarks during a press conference, coupled with a softer US jobs report last week, reduced this probability by half. Although the US economy continues to grow steadily, recent disappointments in purchasing manager indicators and a drop in small business confidence to an 11-year low, alongside moderating job growth, have cast doubt on the narrative of US exceptionalism. The US economic surprise index has reached its lowest level since early 2022, mildly impacting the dollar. Nonetheless, if inflation in the US continues to rise, the expectation that the Fed will maintain higher rates compared to other central banks will uphold the US currency.

Investors are now awaiting further insights from central bank officials and Friday's Michigan Consumer Sentiment Index for a clearer picture of the rate trajectory. The current likelihood of a rate cut in September stands at approximately 67%.

GBP/USD ended a four-day winning streak, slipping below its 200-day moving average and the psychologically significant $1.25 level as traders await the Bank of England’s (BoE) rate decision on Thursday. Yesterday, the pair experienced a downturn as UK bonds saw significant gains once the Gilt market reopened following the UK bank holiday. Traders increased their bets on the extent of BoE easing anticipated for this year.

Anticipation of BoE interest rate cuts is driving up demand for UK Gilts. Particularly, the long end of the yield curve is performing well, with the 10-year yield dropping to its lowest point in three weeks, consequently pulling down GBP/USD. Based on swaps, traders anticipate approximately 55 basis points of cuts through 2024, roughly equivalent to two rate cuts. Our assessment suggests that inflationary pressures in the UK are likely to diminish more swiftly than commonly assumed, potentially paving the way for the BoE to implement rate cuts as soon as June and potentially more aggressively throughout the year compared to market expectations. However, as long as the global trend towards policy easing continues, the downside risk for sterling against the US dollar should remain limited.

However, the situation could be different against the euro. In fact, one-month euro-sterling risk reversals have reached a six-month high, indicating bearish bets on the UK currency. This suggests that more traders are hedging against the risk of the pound depreciating against the euro rather than appreciating.