The GBP appears to be an appealing currency against the EUR and other G10 currencies as the BoE would not lower interest rates as much as the market anticipates. At least, this is what independent economic research and strategy provider BCA Research believes.
BCA has argued that market expectations of BoE rate cuts in 2024 may be a little too optimistic and have speculated that there will be instead lesser rate cuts during the year. Their call comes a few days ahead of the Bank of England’s (BoE) interest rate meeting on the 9th of May. While there is the possibility of an early rate cut in June, the market has currently priced in two 25 basis point interest rate cuts in 2024, with the first happening in August.
If BoE boosts rate cut expectations the pound could decline
In April, speculations about further interest rate cuts made the pound come under pressure and pushed the pound to euro exchange rate lower. Nevertheless, the Bank of England Governor Huw Pill’s recent comments contradicting the growing speculation for rate cuts have helped the pound exchange rate to rebound. This emphasises that increasing speculation on lower rates could weaken the pound, whereas lesser rate cut expectations could boost the British currency.
BCA has suggested to go long (buy) on the British Pound against the Euro, Canadian Dollar, and Swedish Krona. The BCA’s special report on the UK economy highlights one crucial issue, that the Bank of England should do what is possible to bring down high inflation arising from massive wage pressures in the UK.
Robert Robis, the BCA’s Chief Fixed Income Strategist, has highlighted the difficulty of containing inflation without a large drop in services inflation, which is largely driven by wage growth. The BoE expects economic expansion and a fall in inflation, which will be considered a soft landing for the economy. A hard landing would mean a recession, as the only way to fully suppress inflation.
Robis explained that the United Kingdom currently has a very tight labour market and that to get wage growth to slow down will be hard and will require substantial increases in unemployment.
Higher-for-longer interest rates will support the pound
Although, some BoE members suggest the possibility of rate cuts by June, BCA still believes the BoE would prefer a longer period of tighter monetary policy which will underpin the pound.
Although projections of higher interest rates throughout 2024 might put a solid ground under the pound against the euro, Canadian Dollar, and the Swedish Krona, the US dollar is expected to remain a major player in the foreign exchange market. Forecasters see the pound-dollar pair to experience further pressure due to the greenback’s strength.
BCA speculates that the Bank will cut interest rates in 2025 in response to recession, which will weaken the pound. Nonetheless, the strength of the GBP against the EUR and other G10 currencies will depend on the expectations for interest-rate cuts by the Bank of England, with the financial markets expecting the BoE to cut borrowing costs in the June or August meetings.