London – with GBP As one of the best-performing major currencies so far this year, various investment analysts believe that although the pound still has more room to operate The Bank of England may cut interest rates in the short term.
In a recent research report, Goldman Sachs experts were optimistic about the pound, commenting that the pound “tops the list” of the G10 cross-currency basket of major currencies. Analysts insist sterling will rise against the dollar Dollar, the target is 1.31. On Wednesday morning, the GBP/USD cross was trading around 1.28.
UBS had a similar view, with analysts saying Britain “may have become the most stable political story among the G10” parties after early June elections delivered a sweeping victory for the opposition Labor party. The faction took over power earlier this month under the leadership of Keir Starmer.
UBS analysts added: “This, combined with still-high interest rates, could attract capital inflows into the pound after years of structural sell-off.”
Meanwhile, Jane Foley, head of FX strategy at Rabobank, said the pound “will continue to inch higher in the coming months on hopes that investment growth will recover from a very low base.”
She added that “the tone of many of the policies announced by the new Labor government in recent days has been market-friendly… Order in the UK government, coupled with expectations of a warmer relationship with the EU, should bring some optimism”.
A new dawn?
Sterling endured a turbulent period in September 2022, when—Prime Minister Liz Truss and Chancellor Kwasi Quarten make an unplanned fiscal announcement. They ignored the Office for Budget Responsibility (OBR) and revealed a series of unfunded tax cuts to stimulate economic growth.
The market was frightened, Sterling plunges to near parity with dollar. The upheaval follows a period of political instability for Prime Minister Boris Johnson and his handling of Brexit, the Covid-19 pandemic and the outbreak. The ensuing “partygate” scandal.
A few years later, stability is now a central theme of Starmer’s new Labor government.
Finance Minister Rachel Reeves was quick to set the tone for economic and market growth, announcing a new National Wealth Fund aimed at driving investment in gigafactories, ports and hydrogen. and introduced the Budget Responsibility Bill to reaffirm the role of the UK Budget Office.
A quick rebound coming?
The pound has risen recently despite traders expecting the Bank of England may choose to take action. Interest rate cut in August. Falling interest rates traditionally put pressure on the currency because it reduces the potential returns that UK assets offer foreign investors.
Market pricing on Wednesday morning showed a 60% chance of a rate cut at the Bank of England’s August 1 meeting. This lack of certainty could lead to significant market volatility on Thursday. ING developed markets economist James Smith said last week that the start of the BoE’s easing cycle would “create headwinds for the recovering pound”.
Matthew Ryan, head of market strategy at financial services firm Ebury, said in emailed comments on Tuesday that “an immediate rate cut could trigger a fall in sterling.”
Although the overall inflation data released in July were in line with the Bank of England’s 2% target, services inflation remained at 5.7%, higher than its forecast of 5.1%. Policymakers keep a close eye on the services report as a sign of price pressure and a catalyst for Thursday’s interest rate cut.
Speaking at Asia House in London, Bank of England chief economist Hugh Peel struck a cautious note, saying “these indicators suggest some upside risks to my assessment of the persistence of inflation.”
But he did not completely rule anything out, adding that “in the absence of any major new shocks, a ‘when rather than if’ narrative for future bank rate cuts still seems appropriate.”
Abrdn senior research economist Sree Kochugovindan told CNBC earlier this week that the Bank of England’s decision on Thursday was very balanced, but the odds of a rate cut were 5-4. She pointed to signals from Monetary Policy Committee members at the last meeting that they supported the move, but noted that services sector inflation will be the decisive factor in the bank’s next move.
—CNBC’s Jenni Reid contributed to this article.
