The British pound has continued its gains for the third day in a row against the US dollar (GBPUSD). The pound’s gains come despite inflation being reported as at its slowest pace in more than two and a half years. The rise in UK gilt yields and the narrowing of their gap with their corresponding US Treasuries have maintained sterling’s gains.
Today’s numbers do not seem to have changed the markets’ expectations about the possibility of an interest rate cut for the first time next August – the Bank of England is widely expected to keep current rates unchanged at its meeting tomorrow.
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Money markets price next-to-no chance of a move at the June meeting this week. At the time of writing, the GBP OIS curve implies just a negligible 5% chance of a 25bp cut, with the first such cut not fully priced until the November meeting.
Over 2024 as a whole, markets currently discount around 37bp of easing in total, though this is subject to significant change.
In any case, the Bank of England’s guidance, accompanying the decision to hold rates steady, is likely to remain unchanged from that issued after the May meeting.
“Once more, the statement should reiterate the need for policy to remain “restrictive for an extended period of time”, with policymakers also likely to again stress a focus on indications of inflation persistence as the primary determinants as to the timing of the first rate cut,” said Michael Brown, a senior research strategist with Pepperstone. “In addition, the statement will reiterate the MPC’s bias towards the next move in rates being a cut, flagging that they will “keep under review” how long Bank Rate should remain at its current level.”
The UK 10-year gilt yield rebounded after reaching their lowest level in more than two months yesterday. The yield gap between US 10-year Treasuries and their UK counterparts also continued to narrow in what appears to be a downward trend in the short term.
“I believe that the continuation of the downward trend of the yield gap beyond the short term may push it towards zero next, and this would give more momentum to the bullish trend in the pound,” said Samer Hasn, an analyst with FX broker XS.com.
UK gilt yield is advancing
At the same time that UK gilt yield is advancing, German 10-year bund yields looked stable , which has led to a widening of the yield gap to serve the pound’s gains. The UK 10-year gilt yield hit 4.08% today, the US Treasury yield reached 4.129%, and the German bund yield reached 2.389%.
The yield gap between the US and the UK amounted to 0.135%, while the yield gap between the German bund and the UK amounted to -1.692%.
As for today’s data, the growth of the Consumer Price Index (CPI) slowed to 2% on an annual basis in May, as expected from 2.3%, but it grew at a lower-than-expected pace on a monthly basis of 0.3%. Core inflation, which excludes food and energy prices, also slowed to 3.5% from 3.9% on an annual basis.
However, the producer price index reading was mixed, as production input prices held steady on a monthly basis, contrary to expectations of a contraction of 0.3%, while output prices contracted by 0.1%, contrary to expectations of their growth.