Economists at Societe Generale are signaling a critical juncture for the British Pound (GBP) and Gilts as the Bank of England (BoE) grapples with persistent inflation and wage pressures. This situation has resulted in a deceleration of rate cuts and has adversely affected long-end Gilts, raising concerns among investors.
Currently, GBP/USD has experienced a notable pullback after failing to gain traction near the 1.3660 mark. The currency pair has dipped below the 200-day moving average (DMA), which has established the new key resistance level around 1.3430. Experts caution that if the exchange rate cannot breach this barrier, it may trigger a downward movement toward the March lows of 1.3220 to 1.3150. Support for the currency is identified at 1.3220, with resistance at 1.3430.
The outlook for sterling and Gilts is particularly precarious as the BoE faces mounting pressure to respond to inflation and potential wage-driven second-round effects. This dynamic has caused the central bank to adopt a cautious approach regarding interest rate reductions, diminishing the attractiveness of long-end Gilts. Observers note that if upcoming inflation figures, particularly core Consumer Price Index (CPI) data, prove to be higher than expected, there is a reasonable chance that chief economist Huw Pill may be joined by other Monetary Policy Committee (MPC) members in voting for a rate hike in future meetings.
Despite these concerns, some analysts remain hopeful for a potential relief following April’s inflation data, with forecasts suggesting a decline in headline inflation to 3.0% year-on-year and core inflation to 2.6% year-on-year, aligning with market consensus. Additionally, private sector wages are anticipated to rise by 3.1% year-on-year for the three-month period ending in March.
The political landscape is equally tumultuous, further complicating the outlook for the BoE and the Labour government under Prime Minister Keir Starmer. Former Health Secretary Wes Streeting has expressed his intent to challenge PM Starmer’s leadership, while the return of Andy Burnham to Westminster adds another layer of complexity, as he must first secure a victory over rivals from the Reform Party and the Greens in the upcoming Makerfield by-election, expected to take place on June 18.
Both Streeting and Burnham advocate for the UK to rejoin the EU, a proposition at odds with Makerfield’s preference, as indicated by the constituency’s vote to leave in the 2016 referendum. Overall, the combination of economic indicators and political developments will play a significant role in shaping the future trajectory of the British Pound and Gilt markets.
