Key takeaways:
- BoE leaves rates on hold, appears dovish in outlook
- UK pay squeeze comes to an end, inflation begins to cool
- GBP Monthly lows: €1.12, $1.32, AU$1.75, NZ$1.89, C$1.70
- GBP Monthly highs: €1.14, $1.36, AU$1.82, NZ$1.96, C$1.75
May was another rough month for the pound, as the UK currency’s losses were extended by a run of lacklustre economic data.
This downswing in Sterling was most evident against the US dollar, with the GBP/USD exchange rate striking a new six-month low and ending the month over three cents down.
One of the main contributing factors in GBP weakness last month was the Bank of England’s (BoE) latest policy meeting, in which the bank’s Monetary Policy Committee (MPC) voted to leave interest rates on hold.
While this did not come as a shock to investors, after a run of disappointing data and cautious comments from BoE Governor Mark Carney, it still saw the pound suffer some heavy losses.
Sterling sought to claw back some of these losses in the middle of May, as markets welcomed the news that Britain’s year-long pay squeeze seemed to have finally come to an end in March.
However the pound faced further setbacks in the second half of the month in the form of the UK’s latest CPI figures, following an unexpected dip in inflation in April.
So far the pound has fared a little better in June, with some stronger-than-expected growth in the UK’s private sector helping to reignite hopes of a BoE rate hike later in the year.
However Sterling’s fortunes for the rest of the month look a little bleaker, as markets fear June’s EU summit will fail to deliver the breakthrough needed in Brexit negotiations.
The UK government is still to finalise its Brexit white paper, and observers fear that without significant compromise by the UK, the EU will simple reject many of the government proposals, leaving the two sides in deadlock.
This in turn may impact the BoE next policy meeting at the tail end of the month, with the bank possibly pointing to ongoing Brexit uncertainty as one of the major considerations to leave interest rates on hold.
