Pound Surges as Traders Anticipate BOE Delaying Rate Cuts Beyond ECB

The British pound has reached its highest level in over two months against the euro, driven by slower-than-expected declines in UK inflation. This unexpected inflationary pressure has cast doubt on the timing of potential interest rate cuts by the Bank of England (BOE).

Traders have scaled back their expectations for BOE monetary easing, now projecting the first rate cut in September, three months later than the European Central Bank’s (ECB) anticipated initial reduction.

Stronger UK Inflation Alters Rate Cut Expectations

According to Neil Jones, a foreign-exchange expert at TJM Europe, a June rate cut is now unlikely. “August remains uncertain,” he added. Earlier in the week, the market was confident that the BOE would start lowering rates in June, in line with the ECB, and deliver two quarter-point cuts within the year. However, this outlook has changed, particularly as recent data indicates persistent domestic inflation. The pound rose as much as 0.4% to 0.8504 per euro, its highest since February. Market speculation later included the possibility of Prime Minister Rishi Sunak calling an early election, though this had a limited immediate effect.

The shift in interest rate expectations impacted government bonds, with the yield on 10-year UK gilts increasing by 12 basis points to 4.25%, and two-year rates climbing 15 basis points to 4.46%.

“The current market focus is on the timing of initial rate cuts by major central banks, and the drop in EUR/GBP reflects the growing belief that the BOE will not cut rates alongside the ECB in June,” noted Jane Foley, head of FX strategy at Rabobank.

In April, UK consumer prices rose by 2.3% year-on-year, surpassing the 2.1% forecast. Investors are particularly concerned about services inflation, which stayed relatively stable at 5.9%, compared to an expected 5.4%.

“Service inflation is crucial for the BOE as it indicates inflation persistence,” explained Kirstine Kundby-Nielsen, a strategist at Danske Bank. “We will see another inflation report just before the BOE’s June meeting, but a June rate cut now seems unlikely.”

In contrast, Europe is experiencing slower growth and cooling core inflation. Markets are anticipating a quarter-point rate cut from the ECB next month, with at least one more reduction expected by the end of the year.

“The ECB beginning its easing cycle before the BOE could further pressure the EUR/GBP downward,” said Valentin Marinov, head of G10 FX strategy at Credit Agricole.