Key week ahead for GBP ; Inflation data and BOE rate decision expected to generate volatility
The Pound has enjoyed multi month highs through June, boosted by rising short-term UK bond yields but the coming week could see Sterling’s strength halted, owing to the UK's 'sticky inflation' problem – If Wednesday’s inflation data surprises, it is increasingly likely that the Bank of England’s monetary policy committee could strike a cautious tone with Thursday’s interest rate decision.
The alternative perspective could see GBPEUR and GBPUSD continue their momentum with the potential for further gains. GBPEUR has already reached its highest level since August last year, trading as high as 1.1735. GBPUSD rose to its highest point since April 2022, reaching 1.2848 in Friday’s trading session.
Prior to Wednesday’s CPI Inflation reading, BOE Governor Andrew Bailey said that “British food price inflation had been slower to drop than global commodity prices, despite past reassurances from the Bank's contacts in the retail industry that prices would fall”. Despite multiple rate hikes and market leaders like Tesco referencing “encouraging early signs” that inflation is starting to drop, it remains stubbornly high running at over 19% in April, according to official data. With other costs in the supply chain still rising, food producers, manufacturers and retailers continue to face elevated costs throughout their supply chains, from energy prices to labour costs.
Thursday’s meeting is yet another important event for investors, where the MPC are expected to raise rates by a further 25 basis points, to be followed by another in August and September, taking the Bank rate to 5.25 by the start of Q4.
In the housing market, Rightmove reported this morning that rising mortgage rates are cooling the UK housing market, brining forward the usual summer slowdown. Two-year fixed mortgage rates hit 6%, for the first time this year, longer-term fixed rate mortgages have also become more expensive, with the average five-year fixed rate rising to 5.67% today, from 5.62% on Friday. This reflects financial market expectations that the Bank of England will raise interest rates several times this year.
Asking prices for British homes fell in June for the first time in six years. Rightmove’s latest data shows that average new asking prices dipped, slightly, this month for the first time this year. It suggests that some sellers are pricing their properties a little more competitively, as higher borrowing costs dampen the market.
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