GBP: Rate cut repricing and inflation risks – Rabobank

Rabobank’s Senior FX Strategist Jane Foley notes that the Pound has been one of the better performing G10 currencies recently, supported by reduced expectations for Bank of England easing. The bank no longer expects further BoE rate cuts this year, citing sticky UK inflation, higher gas prices and the UK’s sensitivity to energy costs, which could keep UK CPI above target and weigh on growth and confidence.

BoE on hold as inflation stays sticky

"Measured from the end of last week, the pound is the fourth best performing G10 currency, outperforming the EUR which is languishing towards the bottom of the table.

"It is likely that GBP’s better tone vs. the EUR in recent sessions has been derived from a loss of hope regarding the prospects of BoE rate cuts in the coming months."

"Rabobank no longer expects the BoE to be in a position to announce further easing this year. Previously the call had been for two more rate cuts this year in March and June."

"Ahead of the Middle East crisis, a March 19 BoE rate cut had been widely expected by the market, with further easing looking likely later in the year. Currently, the market is priced for just one more 25 bp BoE rate cut this cycle on a 6-month view, while market expectations for a rate cut this month have fallen sharply."

"The recent surge in gas prices triggered by supply concerns related to the Middle East conflict threatens to upend UK inflation expectations, resulting in a more cautious stance by the BoE."

"The removal of March rate cut hopes coupled with higher energy prices clearly threatens to have a detrimental impact on both confidence and UK growth potential."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)