Sterling today: Pound hits lowest since April as BoE hold, hawkish Fed lift dollar
The pound has fallen to its lowest level since April, below $1.33, as the Bank of England maintains a cautious policy stance and the Federal Reserve's hawkish adjustment supports the dollar. The dollar remains strong despite lower oil prices following the US-Iran peace ag…
Intelligence analysis by Llama 3.3 70B
The pound's decline is attributed to the Bank of England's decision to leave interest rates unchanged and the Federal Reserve's hawkish stance, which has boosted the dollar. The euro is also under pressure, with limited appetite for a sustained break below the 1.15 area.
The pound is like a seesaw, and right now, it's going down because the Bank of England isn't doing much to help it. The dollar, on the other hand, is like a strong arm that's holding everything up, thanks to the Federal Reserve being careful about inflation.
Analysis
Monetary Policy Divergence
The Bank of England's decision to leave interest rates unchanged at 3.75% has reinforced the pound's weakness, as the market had expected a potential rate hike to combat inflation. The Monetary Policy Committee's vote of 7-2 to maintain the current rate suggests that policymakers are cautious about the economic outlook and are prioritizing a wait-and-see approach.
The Federal Reserve's hawkish adjustment, on the other hand, has supported the dollar, as the market expects further tightening in the coming months. The Fed's dot plots indicate that nine of the 18 officials see at least one rate hike this year, which has increased expectations for further tightening.
Inflation Risks and Energy Prices
The Bank of England has acknowledged that CPI inflation eased to 2.8% in May, but maintains that inflation risks remain skewed to the upside due to uncertainty surrounding energy prices and potential second-round effects. The recent progress towards a Middle East peace agreement has helped push Brent crude back towards $79 a barrel, but the BoE stresses that energy markets remain volatile.
Market Expectations and Currency Implications
The market expects the euro to find support in the 1.14-1.15 region, particularly as falling energy prices linked to the US-Iran agreement reduce pressure on the euro area's terms of trade and improve the broader risk backdrop. The pound, however, is expected to remain under pressure while the Fed retains a comparatively hawkish bias.
Economic Momentum and Financial Conditions
The Bank of England's cautious approach is also reflected in its assessment of the economic momentum, which is expected to weaken in the coming months. The BoE notes that financial conditions have already tightened materially, with higher mortgage and borrowing costs providing additional restraint without the need for an immediate rate increase.
Broker Outlook and Currency Forecast
ING maintains a cautious outlook on sterling, arguing that the BoE is attempting to 'ride out' the current inflation shock rather than respond with further tightening. The broker expects GBP/USD to remain under pressure while the Fed retains a comparatively hawkish bias.
Key points
- The pound has fallen to its lowest level since April, below $1.33
- The Bank of England has left interest rates unchanged at 3.75%
- The Federal Reserve's hawkish adjustment has supported the dollar
If the US-Iran peace agreement holds, it could lead to lower oil prices and improved global risk sentiment, which could support the pound and other currencies. Additionally, if the Bank of England's cautious approach pays off, it could lead to a more stable economic outlook and potentially stronger currency.
If the Federal Reserve's hawkish stance leads to further tightening, it could strengthen the dollar and put more pressure on the pound and other currencies. Additionally, if the Bank of England's cautious approach is seen as insufficient, it could lead to higher inflation and lower economic growth, which could further weaken the pound.