Daily digest market movers: Pound Sterling is underpinned against majority of currencies
- The Pound Sterling performs strongly against its major peers, except the Euro, even though financial markets expect that the Bank of England (BoE) will start reducing interest rates from the August meeting. Market speculation for the BoE to begin lowering its key borrowing rates in August was boosted by a slightly dovish monetary policy statement commentary on the interest rate outlook.
- In the monetary policy statement, policymakers said the decision to hold interest rates at 5.25% was “finely balanced”, which investors took it as a signal that rate cuts are around the corner.
- Market expectations for BoE rate cuts have also strengthened as annual headline inflation has returned to the desired rate of 2%. In the press conference after the June meeting, BoE Governor Andrew Bailey acknowledged, “It’s good news that inflation has returned to our 2% target.” And “officials want to be sure that inflation should stay low which is why we have decided to leave interest rates unchanged.
- Though price pressures have returned to 2%, officials worry about the risks of persistent service inflation. In May, service inflation decelerated at a slower pace to 5.7% from the prior release of 5.9%. Investors expected the underlying inflation to have declined to 5.5%.
- Meanwhile, investors have become concerned over the United Kingdom’s (UK) economic outlook after the preliminary S&P Global/CIPS PMI report showed that the overall activity unexpectedly slowed in the service sector in June. However, the Manufacturing PMI expanded at a faster pace than estimates and the former release. "The slowdown in part reflects uncertainty around the business environment in the lead-up to the general election, with many firms seeing a hiatus in decision-making pending clarity on various policies," the report said
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