Sterling remains vulnerable to rate cut speculation
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Daily Currency Update
Sterling remains under pressure as GBPEUR slipped to around 1.1650, driven by renewed political instability and weakening UK economic momentum. A growing internal revolt within the Labour Party over welfare spending has cast doubt on the government’s fiscal credibility, amplifying investor concerns. Bank of England Governor, Andrew Bailey struck a cautious tone, acknowledging persistent inflationary pressures while signalling a gradual shift toward a neutral policy stance. However, strong UK wage growth continues to complicate the inflation outlook, adding uncertainty to the timing of future rate cuts.Goldman Sachs has downgraded its GBP forecasts, citing deteriorating UK fundamentals and increased demand for eurozone assets. The euro’s relative strength reflects more stable political and economic conditions across the continent. With UK growth slowing and political risk resurfacing, pressure is mounting on the BoE to consider earlier rate cuts, which could further weaken the pound. Overall, sterling appears increasingly vulnerable, particularly against the euro, as markets reassess the UK’s economic and political trajectory.
Key Movers
The US dollar strengthened, buoyed by upbeat ISM Manufacturing and JOLTs data, as well as rising Treasury yields. At the ECB Forum in Sintra, Fed Chair Jerome Powell maintained a cautious tone, emphasising the Fed’s data-dependent approach. While he didn’t rule out a July rate cut, he offered no strong indication it’s imminent. Powell warned inflation may rise over the summer due to tariffs and reiterated that policy will remain unchanged unless the US jobs market weakness or easing inflation emerges. With inflation still above target, the bar for rate cuts remains high. Markets now await the US Non-Farm Payrolls report on Friday, which could shift expectations.The Euro held steady as ECB President Christine Lagarde confirmed inflation has returned to the 2% target but avoided committing to further rate cuts. Eurozone CPI met expectations, and a decline in consumer inflation expectations supported the ECB’s disinflation narrative. Meanwhile, June’s final manufacturing PMI at 49.5 suggested tentative stabilization in the industrial sector. The ECB appears to be pausing its rate-cut cycle for now, maintaining flexibility. It is unlikely to push back against market expectations for easing unless inflation shows signs of reaccelerating, keeping policy in a wait-and-see mode. Overall, eurozone data supports a cautious but steady ECB stance.
Expected Ranges
- GBP/USD: 1.3615 - 1.3745 ▲
- GBP/EUR: 1.1580 - 1.1685 ▼
- GBP/AUD: 2.0650 - 2.0910 ▼
- EUR/USD: 1.1690 - 1.1825 ▲