After Thursday’s Bank of England (BoE) statement and minutes were released, ING’s FX Strategist Francesco Pesole noted that officials are growing closer to cutting interest rates. Pesole suggested that an August cut is necessary, and that the GBP/USD exchange rate is likely to fall under 1.25 as a result.
One of the main factors driving this potential rate cut is the recent upside surprises in services inflation, which Pesole attributes to volatility related to annual price hikes rather than a significant trend. While the BoE has not pre-committed to anything, Pesole believes that an August rate cut is likely if the next inflation report does not contain any surprises.
ING’s base case scenario includes three rate cuts in 2024, starting in August, which is more dovish than the two cuts currently priced in by the market. Despite this, an August rate cut is only 60% priced in at the moment. This uncertainty leads ING to take a bearish stance on the sterling, although factors such as political events in the eurozone may delay a rebound in the EUR/GBP exchange rate.
Despite potential delays in a EUR/GBP rebound, ING expects most of the weakness in the Pound Sterling to be channeled through GBP/USD. As a result, they anticipate that the GBP/USD exchange rate will trade back under 1.25. This forecast is based on the expectation of an August rate cut by the Bank of England and the overall bearish outlook for the sterling in the near future.
Overall, the market is pricing in a lower number of rate cuts than ING’s base case scenario. However, the potential for an August rate cut remains likely according to Pesole. This uncertainty in the market leads ING to maintain a bearish stance on the Pound Sterling, with expectations that most of the weakness will be reflected in the GBP/USD exchange rate.
With the possibility of three rate cuts in 2024, starting in August, the Bank of England’s monetary policy is expected to become more dovish. This shift in policy, combined with the recent upside surprises in services inflation, has led ING to predict a fall in the GBP/USD exchange rate below 1.25. While the exact timing and magnitude of these rate cuts remain uncertain, the overall outlook for the Pound Sterling remains bearish in the near future.
