RaboResearch said the latest UK CPI and labour figures point to softer inflation and spare capacity, while tighter financial conditions are also in play. Headline CPI was 2.8% y/y in May, unchanged on the month, and core CPI edged up to 2.6% y/y, which the bank linked to the prospect that this year’s inflation peak may come in lower than previously expected. Against that backdrop, it maintained a 1–3 month view for EUR/GBP to drift towards 0.87.
The bank also described a cautious Bank of England stance, with attention on the Monetary Policy Committee minutes and voting split for guidance on whether a hike could be skipped this year. Market pricing for a rapid stretch of tightening rose at the start of the Iran war and has since partly reversed, yet elevated market rates have still tightened monetary conditions, potentially giving the MPC scope to wait for further clarity on oil prices. RaboResearch added that this dynamic could keep BoE rhetoric firm over the summer and leave GBP/USD vulnerable to dips towards 1.33 over 1–3 months.
British Pound Outlook and Central Bank Policy
We see the British Pound facing pressure in the weeks ahead. Recent UK inflation data for May was softer than expected at 2.8%, and a report from the ONS last week confirmed a surprising cooling in the labour market, with wage growth slowing to its lowest level in a year. This economic softening reduces the pressure on the Bank of England to raise interest rates.
The market has already done some of the Bank’s work for it, as yields on UK government bonds rose sharply at the start of the Iran conflict and remain elevated. We believe the Bank of England will use this to its advantage, talking tough on inflation through the summer without actually delivering a rate hike. This creates a ceiling for the Pound, as the prospect of higher rates fades.
Forecasts, Trading Strategies, and Political Risks
Given this outlook, we expect EUR/GBP to climb towards the 0.87 level over the next one to three months. The European Central Bank appears more committed to its own inflation fight, especially after recent data showed German factory orders beating expectations for the second straight month. Traders could look at buying EUR/GBP call options with September expiries to position for this move.
Similarly, we anticipate dips in GBP/USD, or “cable,” back towards the 1.33 area. The US dollar remains supported by a resilient economy and a Federal Reserve that has shown no indication of cutting rates soon, a view supported by last Friday’s strong US jobs report. Establishing short positions in GBP futures or buying put options on the currency pair would be a strategic way to trade this view.
Political uncertainty adds another reason for caution. Growing chatter about a potential autumn general election is creating an environment of unpredictability for investors. Historically, periods leading up to UK elections, such as in 2017 and 2019, have often resulted in increased volatility and weakness for sterling.
