26/07/2024
Written by: Ian Morley
Summary:
Yesterday morning, UK CPI figures exceeded expectations, leading to speculation that rate cuts might be delayed until September. Surprisingly, the GBP failed to gain strength, despite these circumstances. Governor Bailey’s bearish remarks worsened the situation for GBP, as he highlighted concerns about a loosening job market and predicted a significant decrease in inflation next month. He also distinguished the UK’s inflation risks from those of the US, further dampening GBP sentiment. Meanwhile, the USD weakened for the first time in six days due to declining treasury yields and discussions about currency intervention in Japan and Korea. On a positive note for the EUR, the ECB president emphasised the bank’s vigilant monitoring of FX movements.
Speeches:
Market Insight:
Governor Bailey’s cautious statements suggest that yesterday’s CPI figures might not indicate a sustained increase in UK inflation. While current market expectations align with the Fed’s stance on rate cuts, any shift towards an earlier cut by the BoE could further weaken the GBP. Despite short-term USD weakness driven by market repositioning amid central bankers’ discussions on FX, the long-term outlook favours USD strength, especially with the Fed showing reluctance to cut rates. Today, attention will be on speeches from central bankers at the ECB, BoE, and Fed.
Analysis:
Governor Bailey’s comparison of inflationary pressures between the UK and US could spell trouble for the GBP if market expectations for interest rates start pricing in an earlier BoE rate cut. GBPUSD recently breached a significant support level, and although there has been some USD weakness lately, the previous support could now act as resistance. If this scenario unfolds, GBPUSD may revisit the lows observed in October/November 23.