Bank of England may cut interest rates sooner than Fed, putting pound under pressure

The pound (1.2356, 0.0007, 0.06%) exchange rate against the US dollar continued last week's downward trend. The pound's downward trend has continued for several weeks. On April 9, the exchange rate of GBP/USD was still at 1.27 USD/GBP. On April 22, the exchange rate of GBP/USD had fallen to 1.23 USD/GBP.

The British economic growth momentum is insufficient to support the pound exchange rate. From January to March this year, the British economy once showed signs of accelerating growth. Correspondingly, the GBP/USD exchange rate continues to rise. On March 9, the pound-to-dollar exchange rate once rose to 1.29 U.S. dollars to 1 pound, the highest level of the pound-to-dollar exchange rate this year. But the latest data shows that the UK's economic growth momentum is still very weak.

On April 12, data released by the British Office for National Statistics showed that the British economy grew by 0.1% month-on-month in February, and the month-on-month growth rate in January was revised up to 0.3% from the previous 0.2%. In the three months to the end of February, the British economy grew by 0.2% month-on-month. In February, the British manufacturing industry increased by 1.1% month-on-month, the service industry increased by 0.1% month-on-month, and the construction industry shrank by 1.9% month-on-month.

At the same time, the cooling of the British labor market and the slowdown in wage growth also indicate that the British economic growth momentum is lacking. On April 16, statistics released by the British Office for National Statistics showed that in the three months to the end of February this year, the British employment rate was 74.5%, lower than the same period a year ago and lower than the previous three months. s level. The unemployment rate is 4.2%, which is higher than the same period a year ago and higher than the previous three months. At the same time, the number of vacant positions in the market is also decreasing. From January to March this year, job recruitment by British companies dropped by 13,000 compared with the previous quarter. This is the 21st consecutive quarter that the number of job vacancies in the UK market has continued to fall. In addition, the slowdown in employee salary increases also indicates a cooling labor market. In the three months to the end of February, the salary of British employees rose by 6% year-on-year, excluding bonuses, and by 5.6% year-on-year, including bonuses. Compared with the previous period, the growth rate has slowed down.

In addition, the latest UK retail sales data for March was lower than market expectations, which also shows that the British economy is still struggling. Kris Hamer, research director of the British Retail Consortium, pointed out that British consumers' consumer confidence is still insufficient. Due to the increase in living costs, British consumers still strictly control their spending, which has led to a serious shortage of large-ticket items such as furniture.

Many research institutions pointed out that the British economic recovery is weak. Roger Barker, director of policy research at the Institute of Directors, pointed out bluntly that the UK economy barely grew in February, indicating that the economy remains in a fragile state. After a strong start to the year, consumer-facing parts of the UK economy - particularly accommodation and food services - have retreated. Construction was also surprisingly weak, despite encouraging signs of recovery in production and manufacturing output.

Hailey Low, an assistant economic researcher at the National Institute of Economic and Social Research (NIESR), pointed out that the UK’s monthly GDP increased by 0.1% in February, with all major industries except construction making contributions. contribute. Economic growth in the three months to the end of February was 0.2%, which seems to have emerged from the turning point of economic contraction at the end of last year. But taking a longer view, the British economy has maintained very low growth levels since 2022.

Due to the lack of economic growth momentum and the recent rebound in U.S. inflation, the Bank of England may cut interest rates sooner than the Federal Reserve, which has put pressure on the pound against the dollar exchange rate. Due to the supply shock caused by the Red Sea conflict, the market expects that the Bank of England may implement its first interest rate cut in August. Some institutions predict that the Bank of England's interest rate cut may come sooner. The media CNBC quoted analysis from Morgan Stanley as saying that the Bank of England may implement an interest rate cut in May.

Data released by the British Office for National Statistics on April 17 showed that in March, the British consumer price index (CPI) fell to 3.2% year-on-year from 3.4% in February. At the same time, excluding the impact of food, fuel, etc., the UK's core price index fell to 4.2% year-on-year in March from 4.5% in February. The market expects that British inflation pressure will continue to fall in April. In response to the current situation that the British store price index fell sharply in March, Julian Jessop, an economist at the Institute of Economic Affairs, pointed out that the latest falling price index shows that the Bank of England needs to cut interest rates as soon as possible.

The Bank of England has seen the differences in the development of inflation between the UK and the United States and continental Europe. Bank of England Governor Andrew Bailey recently said that inflation dynamics between Europe and the United States are now quite different. Inflation in the US is mainly demand-led, which is more severe than in the UK.

Now, whether and when the Bank of England will cut interest rates has become the main factor affecting the pound against the dollar exchange rate in the short term. If the Bank of England does not cut interest rates, the British economy will be unable to boost and the pound-dollar exchange rate will lose support. If the Bank of England cuts interest rates sooner than the Fed, the GBP/USD exchange rate will also come under pressure. Therefore, in the short term, the current GBP/USD exchange rate will still hover at the bottom and may even fall further.