Where next for the British Pound

Clouds on the Horizon

by Macro D

Let's start on June 1st. Back then, the Bank of England was already expecting a slowdown in the rise in inflation in the UK. However, it was not "optimistic" about it after price growth continued to prove more persistent than expected. In short, the direction seemed to be the right one, despite the disinflationary process proceeding at a slow pace, with wage growth in the private sector that was "well above what would be consistent with a 2% inflation target". Core inflation remained elevated at 3.8%, with the service component still well above 5%. At the beginning of the month, the British pound was one of those currencies that made me nervous. I saw it perform, while my macro reasoning pushed me constantly to be on the alert for the right moment to short His Majesty's currency. But why was the pound going strong? There were two factors supporting the strengthening of the British currency.

1. The growing weakness and distrust of the market towards the US Dollar.

2. The cautious attitude of the BoE, which, in light of the new macro data, showed an increasingly less aptitude to cut interest rates.

Source: Dall-E

In addition, the first quarter of the year showed that the United Kingdom could count on one of the most solid growth rates among the G7 countries. This being the case, since the beginning of the month, it was expected that the BoE would remain on the sidelines, also waiting for a move by the Fed. It was a no-go. If Powell did not lift a finger, it can be said that Bailey did the same. But why? Of all the major currencies, the British pound, along with the US dollar, is currently guided by central bankers who wait, sitting on the bench, for more propitious days. Meanwhile, the UK is facing an apparent economic slowdown, with GDP contracting by 0.3% in April 2025, marking the first decline in six months and the most significant since October 2023. These numbers do not make Keir Starmer happy, even though he knows he has to take responsibility (even if he does not admit it to the press). Rising energy bills have weighed on household budgets, while increasing employers' social security contributions and rising Stamp Duty Land Tax rates have weighed on businesses and the housing market.

But now, let's try to widen the circle, tightening the noose around these latest data.

Let’s dig in.