What’s Next For The British Pound And The BoE?

June 08, 2023 17:30

The UK economy will likely record the third highest CPI inflation reading among advanced economies after Argentina and Turkey in 2023. If this piece of information got your attention, we can assure you that it isn’t based on some random hypothesis. With just two weeks before the next BoE board interest rate meeting, such reports support the views of policymakers who’d like to see higher interest rates in the next few months. 

According to the Organization for Economic Cooperation and Development (OECD), the UK CPI inflation is expected to come in at 6.3% this year. The anticipated figure could bring the UK just behind Argentina and Turkey, two countries that are known for their inflation problems and weakening currencies such as the Turkish lira and the Argentinian peso.

The British pound has strengthened against the euro and the US dollar in 2023, but some analysts are not sure whether it could surge more, based on weak financial data reports related to the UK’s economy. If you want to know more about the state of the UK economy, how the British pound has been affected and what analysts think, read our blog.

BoE to decide on rates on June 22nd

On June 22nd the Bank of England’s (BoE) governing board is expected to convene and decide on interest rates. Since December 2021 the BoE has raised borrowing costs 12 consecutive times, the sharpest increase in rates in the last 34 years.

A Reuters poll published on May 31st showed that fourty-eight of the 50 economists surveyed expected a 25 basis point lift after the June meeting, with two expecting a bigger 50 basis point increase. Meanwhile, 27 of 47 forecast the Bank Rate to reach 5.00% or higher by end-September.

The poll’s results indicated that economists no longer expect a pause in the BoE’s monetary policy tightening as they had forecast at the beginning of May. This doesn’t come as a surprise as the latest report by the Office for National Statistics (ONS) revealed that UK’s CPI inflation fell to 8.7% on an annualised basis, but the figure was still 0.5% higher than anticipated.

On the contrary core prices (excluding volatile energy, food, alcohol and tobacco prices) rose by 6.8% in April, up from 6.2% in March. It should be noted that the UK’s government has vowed to halve inflation this year while the BoE’s long-term target is to bring headline inflation down to 2%.

British pound rises in H1 2023 but some analysts stress caution

Economists at Credit Suisse noted in a report that “our expectation is for headline inflation to continue to fall and for some of the strength in core inflation to reverse in the coming prints. We also expect a mild recession that should allow the BoE to pause in August (earlier than market pricing).” The Swiss bank’s analysts also stressed that “we have increased our BoE terminal rate forecast from 4.75% to 5.0%. We now expect two more 25 bps hikes from the BoE (in June and August), compared with one before and no rate cuts in 2023. This is driven by the upside surprise in UK inflation.”

Commerzbank’s economists stressed that the BoE’s hesitant stance could be negative for the British pound. In a note published on June 2nd they said: “The market will probably have to scale back its interest rate expectations, which is why we are sticking to our forecast that the Pound will weaken against the EUR in the coming months. After all, in contrast to the BoE, the ECB appears much more determined in its statements, which should support the EUR. GBP weakness will probably continue next year as well, as the BoE is likely to cut its key rate in view of the weak economy and somewhat lower inflation.”

Currency strategists at JP Morgan said that a more protracted pullback could be on the way in response to deteriorating economic growth fundamentals, adding that "the lack of GBP appreciation on the back of the shockingly high inflation print in the UK signalled that the sterling reaction function may be shifting given the growth implications."

Strategists at Goldman Sachs (GS) say that the BoE appears reluctant when it comes to rate hikes but the sharp uptick in inflation and the strong labour market seems likely to force them towards further policy tightening. GS economists raised their terminal Bank Rate forecast suggesting it could rise to 5.25% by September (previous forecast: 5% in August), which would mean that three more 25 basis points hikes could be on the way.

Trading the British pound and risk management

The British pound is one of the most traded currencies in the global financial markets. The UK’s currency is quite often in the media outlets' financial headlines. As there is an abundance of information regarding the British pound, some beginner traders may feel the need to include the trading instrument in their portfolio.

However, beginner traders should refrain from listening to market jitters and realise that trading involves risk. Opening a trading account may not be difficult but it is also quite easy to lose funds when trading if you are not well prepared. Risk management should be the priority for beginner traders.

There are many risk management tools that beginner traders can learn to use when building their strategies. With a broad variety of webinars, seminars, articles and e-books prepared by trading experts, there should be no excuse to neglect upgrading your knowledge. Also, a demo account provided by a fully regulated broker could give you the opportunity to test your strategies with virtual funds.  

Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with expert traders. Watch and learn from live trading sessions.

Free trading webinars

Tune into live webinars hosted by our experienced traders

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.