Sterling slightly up ahead of BoE policy clues

Sterling edged up slightly on Monday as investors awaited further indications on the Bank of England’s (BoE) monetary policy from the upcoming S&P Global Composite Purchasing Managers’ Index, due on Wednesday.

Sterling rose 0.05 per cent to $1.2935, following a peak of $1.3044 last week, its highest since July 2023. This marks the third consecutive week of increasing long positions, reaching a record $10.769 billion.

Despite inflation surpassing forecasts last week, reducing the likelihood of an imminent rate cut by the BoE, analysts suggest sterling remains attractive compared to other risk-sensitive currencies. This is due to the UK’s lesser dependence on the Chinese economy and a more stable political environment than the euro area.

Meanwhile, the euro remained stable at 84.22 euros per pound after reaching a 1.5-week high of 84.32 euros on Friday. The sterling’s strength is viewed as a potential removal of the Brexit risk premium, with new Prime Minister Keir Starmer showing a willingness to engage more closely with Europe.

Market participants are also watching new finance minister Rachel Reeves, who is expected to announce her first budget post-parliament’s summer recess. Reeves and Starmer have ruled out increases in major taxes, which limits options for enhancing public services and investment.

The BoE is anticipated to hold off on rate cuts in August if the Federal Reserve follows suit in September, as currently priced by the markets. Investors are betting on a 40 per cent chance of a BoE rate cut in August, rising to over 80 per cent in September.

Despite these factors, concerns remain about the UK’s economic outlook, highlighted by recent weak retail sales figures. Citi’s chief UK economist, Benjamin Nabarro noted that the fragility of the economic recovery is underscored by the June retail sales drop, which casts doubt on underlying momentum.

Attribution: Reuters