GBPUSD Fundamental Analysis – 18-June-2024

The GBP/USD has been trading around $1.3, approaching its highest level in a year. This development comes as traders adjust their expectations regarding a potential interest rate cut by the Bank of England (BoE) in August. Recent economic data plays a crucial role in this shift.

UK Inflation Steadies Above Predictions

Inflation is a key indicator of economic health, and in June, the UK’s inflation rate steadied at 2%, slightly higher than the forecasted 1.9%. Services inflation, a measure of price changes in the service sector, remained at 5.7%, significantly above the BoE’s forecast of 5.1%.

High inflation typically leads central banks to maintain or raise interest rates to control price rises, affecting borrowing costs and economic activity.

Persistent Inflation Lowers Rate Cut Chance

Before the Consumer Price Index (CPI) release, there was nearly a 49% chance that the BoE would cut interest rates in August. However, following the data showing persistent inflation, this probability has dropped to around 33%. The market’s reaction reflects a reassessment of the likelihood that the BoE will need to keep rates higher for longer to curb inflation.

Wage Growth Slows Yet Stays High

Another crucial factor is wage growth, which slowed to 5.7%, the lowest rate since 2022. Despite this slowdown, wage growth remains high, sustaining consumer spending and, thus, inflation. The unemployment rate also held steady at 4.4%, the highest since 2021. Low unemployment and strong wage growth can lead to higher spending and persistent inflation pressures.

BoE Chief Warns of Persistent Inflation

BoE Chief Economist Huw Pill recently highlighted the significance of ongoing services price inflation and strong wage growth. His comments underscore the central bank’s concerns about underlying inflationary pressures, making a rate cut less likely in the near term.

Final Word

In summary, the British pound’s strength is tied to reduced expectations of an imminent rate cut by the BoE, driven by steady inflation and resilient wage growth. For investors and market participants, these indicators suggest that the BoE may maintain higher interest rates longer to manage inflation, influencing economic decisions and market dynamics in the UK.

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