Bank of England hawk Catherine Mann recently expressed concerns about disinflation and the risks of the BoE cutting interest rates too early. While Governor Andrew Bailey has not made any significant statements on monetary policy, he has one more chance to do so at an upcoming event. This could potentially impact the Pound Sterling on Monday, according to ING’s FX analyst Francesco Pesole.
The UK’s PMIs were weaker than expected, putting additional pressure on the BoE. The focus now shifts to the UK budget announcement next Wednesday, where Chancellor Rachel Reeves plans to increase investments and potentially borrowing. This has led to gilts underperforming other developed market bonds, with expectations of UK yields rising. The FX market is watching closely for any potential volatility resulting from this announcement.
With the GBP currently not factoring in any risk premium, there are significant downside risks for the currency. This, combined with defensive positioning ahead of the UK budget and US election risks, could lead to a bearish bias on GBP/USD. ING’s view is that the currency could reach 1.28 in the near term, as market sensitivity to the budget announcement continues to play a key role in shaping investor sentiment.
As the gilt market and GBP await the UK budget announcement, there is anticipation for potential volatility and market reaction. Any underperformance in gilts could lead to increased yields, impacting the FX market. The current lack of risk premium in the GBP leaves room for larger downside risks, which could be further exacerbated by defensive positioning ahead of upcoming events.
Despite the uncertainty surrounding the UK budget and US elections, there is a consensus view that UK yields have room to rise. The potential increase in borrowing and investments as announced by Chancellor Reeves may lead to increased volatility in both the gilt and FX markets. ING’s bearish bias on GBP/USD reflects the cautious sentiment among investors, with the possibility of reaching 1.28 in the near term. The market remains sensitive to any developments ahead of the upcoming events that could shape the direction of the Pound Sterling.
Overall, the combination of cautious market sentiment, potential volatility in response to the UK budget announcement, and upcoming risks such as the US elections are key factors influencing the GBP’s performance in the near term. Investors will be closely watching for any further statements from Governor Bailey and other key figures, as well as the market reaction to the upcoming events to gauge the currency’s future performance.
