Rabobank’s senior currency strategy specialist, Jane Foley, notes that the pound has been one of the better performing G10 currencies recently, supported by reduced expectations for monetary policy easing by the Bank of England. The bank does not expect any further BoE rate cuts this year, citing persistent UK inflation, higher gas prices and the UK’s sensitivity to energy costs, which could keep UK CPI above target and negatively impact economic growth and confidence.

The BoE paused due to persistent inflation

“As of the end of last week, the pound is the fourth best-performing G10 currency, ahead of the euro, which is at the bottom of the table.

“It is likely that the improved GBP/EUR tone in recent sessions is due to the loss of hope on the prospects for BoE rate cuts in the coming months.”

“Rabobank no longer expects the BoE to be able to announce further easing of interest rates this year. It had previously called for two further interest rate cuts this year, in March and June.”

“Before the Middle East crisis, the market widely expected a BoE rate cut on March 19, with further easing likely later in the year. The market is now pricing in just one more 25bps BoE rate cut this cycle over a six-month horizon, while market expectations for a rate cut this month have declined sharply.”

“The recent rise in gas prices triggered by supply concerns related to the Middle East conflict threatens to upend UK inflation expectations, resulting in a more cautious stance from the BoE.”

“Removing hopes of a March rate cut, coupled with higher energy prices, clearly risks having a damaging impact on both confidence and the UK’s growth potential.”

(This article was created with the facilitate of an artificial intelligence tool and has been reviewed by an editor.)