Two exciting Thursdays for the pound

The British central bank may already anticipate an interest rate cut next Thursday. That could have major consequences for the pound. Due to the local elections next Thursday, the political uncertainty surrounding the currency is also increasing.

The British pound has launched in 2024. In January the currency rose by 2% against the euro. The main reason for that rally was the prospect that the Bank of England (BoE) would cut its policy rate later than the European Central Bank (ECB). These types of interest benefits often play an important role in currency markets. However, there is a good chance that traders will have to adjust their view in the near future. In mid-April, BoE Chairman Andrew Bailey emphasized that Britain's inflation outlook was clearly diverging from that of the United States. And a few days ago, fellow board member Dave Ramsden noted that disinflation in the United Kingdom is catching up.

Reversed world: everything becomes cheaper
By this Ramsden means that there are all kinds of things where it is already clear that all kinds of prices will rise less quickly in the future. In some cases, the price increase even turns into a decrease. For example, because the government has introduced a price ceiling, households will already spend about 12% less on electricity and natural gas this spring. In addition, food prices are also falling rapidly. Inflation is currently only 4%, while in the spring of 2023 that percentage was still 19%. The purchasing rates at food companies indicate that inflation in this segment will move towards zero in the coming months. Core inflation stood at 4,2% in March, but everything indicates that this rate will fall.

Clear signal
The way in which various BoE board members are already talking about the favorable inflation outlook also sends a very clear signal to currency markets. In recent years, directors of the British central bank have made these kinds of comments about future policy much less often than their colleagues at the ECB or the Federal Reserve. Anyone who reads between the lines will see that the policy interest rate in the United Kingdom will fall significantly sooner than the American one. In recent years, interest rates in the UK and US have often moved in tandem. Bailey and Ramsden's hints indicate that the UK policy rate is likely to be cut in August. And maybe even as early as June – just like on the European mainland.

Political upheaval
In any case, the BoE meeting next Thursday, May 9, is still too early for this. But if that meeting reveals that concerns about British inflation are indeed quickly fading into the background, it could contribute to a change in sentiment around the pound. That change can be initiated as early as next Thursday. That day the British go to the polls for local elections. A heavy defeat for the Conservative Party could fuel political unrest in the run-up to the House of Commons elections, which are likely to take place towards the end of the year.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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