Sterling poised for weekly gain ahead of UK inflation data

Sterling poised for weekly gain vs. USD ahead of UK inflation data release

Pound sterling was poised for a weekly gain against the dollar on Friday, as currency traders anticipated key data releases next week that could indicate the timing of potential interest rate cuts by the Bank of England.

Sterling dipped 0.1% on the day to $1.2656 but remained on track for a weekly gain of 1%. Against the euro, sterling rose 0.1% to 85.70 pence.

At the time of writing on 13:30 GMT on Friday, May 17, sterling had regained strength against the greenback, with GBPUSD trading at 1.2668 — flat on the day. EURGBP fell by close to 0.1% to trade at 0.8568.

Data released this week revealed that British wages grew more than expected in the first quarter, though other indicators suggested a cooling in the labor market's inflationary pressures.

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UK inflation data due next Wednesday, followed by flash PMIs

Important UK consumer price inflation data is expected on Wednesday, followed by “flash” PMI data on British business activity the next day.

According to LSEG data, money markets are currently pricing in around a 55% chance of an interest rate cut in June.

A note by economists at Investec cited by Reuters read:

“Our baseline case is still a June rate cut. We do consider however that significant reductions in the pace of private pay and the rate of services inflation could be quite a stretch and that the Monetary Policy Committee (MPC) could delay a move to August”.

Late last week, UK GDP data showed 0.6% growth in Q1, confirming that the British economy had emerged from a mild recession experienced in 2023. The 0.6% reading was notably higher than the forecasted 0.4%.

On Tuesday, Bank of England chief economist Huw Pill mentioned that the UK central bank might consider cutting interest rates over the summer.

EURGBP forecast: ING seeks downside risks ahead

As for the EUR to GBP pair, ING Group FX analyst Francesco Pesole said the risks were “skewed to the dovish side” for the BoE, meaning EURGBP could move higher in the coming months:

“EUR/GBP has come off its 0.8610 peak in the past couple of sessions likely thanks to the good performance of US equities, to which the pound has higher sensitivity than the euro. At the same time, volatility in the pair seems to be abating ahead of the key CPI figures in the UK next week.

Our UK economist, James Smith, currently sees risks skewed to the dovish side for the Bank of England, and we continue to like the chances of a move higher in EUR/GBP as markets may increase their bets on a June rate cut”.

ING’s euro to sterling forecast saw EURGBP trading around the 0.87 mark throughout Q2 and Q3 2024, before rising to 0.88 in the final quarter of the year.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.