Societe Generale strategists note that sterling dip buying has kept GBP/USD trading above its 200-day moving average near 1.3403, even as dollars remain under pressure. The pair is trading in the range of 1.3400-1.3500, and investors are assessing the nomination of up-to-date Chancellor John Healey and the upcoming CPI data in the UK, which – in their opinion – will show a moderate weakening in headline inflation and service prices.
Sterling supported as investors pay attention to CPI
“The decline in sterling purchases keeps GBP/USD above the 200 dma (1.3403) and halts the rebound in EUR/GBP. The UK CPI for June will be published tomorrow. SG Economics forecasts a decline in headline to 2.7% year-on-year from 2.8%, below BoE estimates, and in services to 3.6% from 3.7%, but without a base change of 2.6%.
“The wages data was unmarket-driven for the BoE, but the modest decline in private sector wages to 2.9% year-on-year is welcome and provides some minor relief in the broader debate on inflation and the threat of second-round effects. The Treasury bond premium to Bunds is trading near the highs of the Truss debacle in September 2022 at 140 basis points.”
“Despite a £4 billion decline in public debt in May to June as a result of falling debt interest payments, the deficit remains at £2.7 billion, ahead of the OBR forecast for April to June, due to a £3.6 billion overspend. Receipts are up 7.2% year-on-year.”
“Although the spread is just over 170 basis points at the end of 2024, there should be room for further tightening if the up-to-date Chancellor manages to steer public finances into safer waters in the autumn budget. The structurally higher level of inflation in the UK compared to the euro zone is the second, if not the most significant, piece of the bond puzzle. Political stability, a commodity that has been sporadic since the 2016 EU referendum, could tempt investors to change course to a more bullish one.” Gilts provided that inflation and the level of government spending can be brought under control.
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