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Sterling Firms Versus Euro and Dollar After UK Inflation Data

Following the release of UK inflation data, the British pound strengthened as underlying price pressures indicated the Bank of England (BoE) might delay interest rate cuts.

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In May, British inflation reached its 2% target for the first time in nearly three years, with services prices rising by 5.7%, reflecting strong underlying inflationary pressures. This data led to a reassessment by markets, reducing the probability of a BoE rate cut in August from around 50% to 30%. Expectations for monetary easing in 2024 also decreased slightly from nearly 50 basis points (bps) to 44 bps.

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Against the euro, the pound gained, with the euro falling 0.20% to 84.32 pence. Against the dollar, the pound rose by 0.16% to $1.2730.

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Ruth Gregory, deputy chief economist at Capital Economics, maintained a forecast that the BoE might initiate a rate cut from 5.25% in August, contingent on improvements in services CPI inflation and wage growth in subsequent months. Recent data indicating faster-than-expected British wage growth suggests potential support for this outlook.

Jamie Dutta, a market analyst at Vantage, emphasized the uncertainty surrounding the BoE’s upcoming decisions, particularly how the bank will manage its forward guidance amid the UK’s general election on July 4. The election outcome could influence the BoE’s policy direction and messaging.

Analysts surveyed by Reuters last week generally expect the BoE to start easing monetary policy in August, with the majority predicting at least one more rate reduction this year, despite persistent challenges posed by high pay and services inflation.

Overall, the article highlights the market’s cautious optimism regarding the UK economy’s inflation trajectory and its implications for future BoE policy decisions.

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