Pound Sterling Consolidates Gains Against Euro and Dollar, Tipped to Stay "Robust"

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The British Pound consolidates recent gains made against the Euro and Dollar, and some analysts we follow expect further robust trade ahead.

The Pound to Euro exchange rate holds above 1.17 for the fourth consecutive day on Tuesday and the Pound to Dollar exchange rate looks well supported above 1.27. The Pound rose after last week's above-consensus UK inflation print and announcement of a General Election, which has forced the Bank of England into a period of pre-election purdah.

We would have expected to hear from several Bank of England officials in the coming days regarding the outlook for interest rates, but the election announcement means members of the Bank join other civil servants in refraining from official communications ahead of the July vote.

"The Bank of England's cancellation of public engagements for its policymakers up until the July 4 UK general election is positive for the pound, as it lessens the already low risk of a BoE rate cut next month," says Robert Howard, a Reuters market analyst.

Markets saw an above-50% probability of a rate cut at next month's policy decision, an expectation that had weighed on Pound exchange rates.

But the above-consensus inflation print for April saw those expectations retreat and the Pound rise. In order to cut in June, members of the Bank's Monetary Policy Committee would need to prepare the market for such an eventuality via a series of speeches.

This won't happen now, meaning the earliest opportunity for a cut would be August. This can see the Pound supported against currencies belonging to central banks that will cut sooner and more regularly, like the European Central Bank.

"The BoE may not want to make headlines during the election campaign with an unexpected rate reduction two weeks before Britain votes. Any Monetary Policy Committee member minded to join Swati Dhingra and Dave Ramsden in voting for a cut is therefore likely to keep their powder dry until August 1," says Howard.

"Markets scaled back their expectations for rate cuts, which strengthened the GBP to our three-month target. As the BoE will likely cut after the ECB, we continue to see a robust pound and stick to our current forecasts," says David Alexander Meier, an analyst at Julius Baer.

The ECB is widely expected to cut interest rates in June and the Federal Reserve is expected to do so in September. "Several European Central Bank policymakers signalled the likelihood of an interest rate cut at next week’s policy meeting and one suggested that there may be a further immediate follow-up reduction in July," says Rhys Herbert, an economist at Lloyds Bank.

Julius Baer's forecast for Euro-Pound on a 3-month horizon is 0.85, which equates to a Pound-Euro target of 1.1765. The bank's forecast for Pound-Dollar is 1.22.

"We have been more cautious in our expectations for BoE rate cuts, pencilling in the kick-off at the 1 August meeting. While we maintain this view, we acknowledge that the probability for the August cut has also fallen," says Meier.

Jane Foley, Senior FX Strategist at Rabobank, says the prospect of an improved political backdrop is an additional supportive development for the pound.

She notes the Labour Party, which polls say should comfortably win the vote, has adopted more market-friendly policies. "While traditionally, the market is more cautious about a left-of-centre government, the Labour Party has been openly wooing UK business," she says.

Rabobank maintains a 6-12 month forecast of EUR/GBP 0.84 based on the view that a more stable UK political "landscape will allow GBP to continue the slow, grinding recovery that has been in evidence since the start of 2023."

EUR/GBP at 0.64 equates to a GBP/EUR conversion of 1.19.