Pound Sterling is the strongest G7 currency in the last month.
EURGBP made a new 2024 low as UK inflation failed to fall further. Services inflation stayed stuck at 5.7%.
An August cut from the BoE looks unlikely and only two cuts are expected this year.
Currency markets are stable ahead of the ECB meeting on Thursday which is expected to be a routine meeting with no key announcements or signals on future policy. The euro is largely unmoved and EURGBP remains around 0.84 after falling to a new 2024 low of 0.838 earlier this week. This was a move primarily driven by pound strength rather than euro weakness as UK inflation failed to slow as expected. Indeed, it stayed exactly unchanged from previous readings of 2.0% and this may mark the lowest reading of the year; further progress will be increasingly difficult.
No More Progress on UK Disinflation
The three data series in CPI – headline, core and services – were all expected to drop slightly in June but all remained completely unchanged. This was not disastrous when we consider the headline figure is 2.0%, which is much lower than other countries and at the BoE’s target, but the other readings were less encouraging. Core CPI stayed at 3.5%, while services stayed at an uncomfortable 5.7%. The BoE is mostly focused on services inflation so this does not bode well for a rate cut, especially since the economy does not show any immediate need for one. The odds of a cut in the next meeting on August 1st have fallen back and only 9bps is priced in (of a potential 25bps).
Markets now only expect two cuts from the bank this year, and this will keep the pound bid. It is currently the strongest currency in the past month as GBPUSD reached 1.30 for the first time since July 2023, and EURGBP dropped to the lowest rate since summer 2022 earlier this week.
New Zealand Inflation Falls and NZD Rises
The week’s other CPI release was in New Zealand which reports quarterly figures instead of monthly. The headline figure fell from 4.0% to 3.3% in Q2 which is encouraging for the RBNZ. However, they had already shifted dovish in their last meeting so the numbers were not much of a surprise. Additionally, the individual components showed less progress. As ING explains,
“[the drop] was entirely driven by tradeable CPI, while the non-tradable CPI index slowed less than expected, from 1.6% to 0.9% QoQ against expectations for 0.8%. Given the recent dovish turn by the RBNZ, markets were probably expecting a more decisive decline in non-tradable inflation…”
This helps explain why the New Zealand Dollar actually rose strongly following the release, although the move needs to be taken in context of the overall weakness. NZD is the worst performing G7 currency in the last month and the RBNZ’s dovish shift could lead to further falls.
USD Also Weakens
The US dollar is the second weakest currency in the past month and the DXY dollar basket has dropped to levels last seen in March. This is understandable given the last CPI release came in negative and has made a September rate cut almost certain. There is also some political risk starting to be priced in ahead of what will be a long election campaign. Markets are speculating on what a Trump presidency will mean for the US dollar. Last time around, he clearly wanted a weaker currency to compete with China. This is being balanced against the potential for a loose fiscal policy and higher yields. In other words, there is not yet any strong indication the dollar will be lower or higher under Trump, but this could change closer to the election.
