- According to recent trading, the pound has strengthened against its US dollar counterpart after inflation returned to the Bank of England’s target for the first time in nearly three years.
- Accordingly, the pound has been trading steadily against the US dollar this year, and the GBP/USD price is stable around 1.2720 at the time of writing.
- However, experts warn that the currency could come under pressure if the Bank of England starts cutting interest rates now that price stability has been restored.
According to the economic calendar and data from the Office for National Statistics (ONS), annual inflation fell to 2% in May, down from 2.3% in April. Clearly, this was in line with market expectations. On a monthly basis, inflation rose at a slower-than-expected pace of 0.3%, unchanged from April. Core inflation, which excludes volatile food and energy components, slowed to 3.5% last month, down from 3.9% the previous month. Also, it rose 0.5% in May. Input prices, which measure the prices that businesses pay for goods and services, were unchanged in May. Output prices fell 0.1%.
Finally, the UK retail price index rose 0.4%, down from 0.5%. On an annual basis, the index fell to 3% last month, down from 3.3%. obviously, that was slightly below economists’ expectations of 3.1%. With inflation back at the Bank of England’s 2% target, does that mean policymakers will start cutting interest rates? Market watchers say not yet.
According to analysts at Pepperstone, “despite today’s numbers, the has three reasons to keep policy on hold: the hotter-than-expected inflation numbers in April/May cast some doubt on the pace of inflation’s decline; profit growth is still running high, close to 6% year-on-year; and perhaps most importantly, the June meeting is two weeks ahead of polling day, with policymakers providing no new guidance since campaigning began last month.”
However, experts say the central bank is likely to cut rates before the end of the year.
On the global central bank policy front, The BoE is expected to keep its key interest rate at a sixteen-year high of 5.25% at its June 2024 meeting, but investors will be looking for clues about the central bank’s future plans, as no policymakers spoke due to the election campaign. In May, UK inflation hit its 2% target for the first time in nearly three years, but services inflation, a key focus for the central bank, beat expectations. Moreover, analysts will be closely watching the split vote to gauge the likelihood of future monetary easing. Back in May, two members of the committee favored a 25bp rate cut, compared to just one member at the March meeting.
A major policy shift is not expected until August, with one rate cut expected before November. However, uncertainty looms over the possibility of a second cut.
Technical forecasts for the GBP/USD pair today:
For four consecutive trading sessions, the GBP/USD price has been trying to bounce higher to avoid further losses and this could succeed if the currency pair moves towards the resistance levels of 1.2775 and 1.2830 respectively. Obviously, the strength of the US dollar in the forex market ensures that the recent downward shift remains, and this will depend on the decisions of the Bank of England today and the results of the US data led by the weekly jobless claims number. In contrast, according to the performance on the daily chart above, the 1.2600 support level will remain the most important for the strength of the bears’ control over the trend.
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