The pound heads for a recovery

18 Nisan 2024

Today’s market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

The British pound is advancing by 0.15% against the US dollar at approximately 6:30 a.m.
GMT, after reaching its lowest level since last November yesterday.

The pound’s gains today come after a smaller-than-expected slowdown in inflation last
March, which may dampen even hope for the possibility of an already delayed interest rate
cut in August.

Annual inflation slowed to 3.2% from 3.4%, which was higher than expected at 3.1%, and
inflation continued to rise on a monthly basis by 0.6%. Also, core inflation, which excludes
food and energy items, slowed less than expected to 4.2% on an annual basis and
continued to grow by 0.6% as well.

While producer prices witnessed a contraction at the input level by 0.1% on a monthly basis
after growing by 0.3% in February. This contraction was unexpected but represents the
slowest pace of input price contraction in five months, excluding January’s revised reading.

The pound needs such surprises in inflation figures, the labor market, and economic activity
to be able to confront the dollar, as there is gradually diminishing hope about the possibility
of cutting the interest rate soon, with a set of supporting data, most notably the return of
inflation to acceleration. It also needs to narrow the gap in bond yields, which widened this
month by the largest amount this year.

While the probability that the Federal Reserve will cut interest rates in June by 25 basis
points is only 12%, after exceeding 60% earlier last month, according to CME FedWatch
Tool.

Thus, it appears that the markets have actually abandoned the hypothesis that the Fed’s
monetary policy will begin to ease with the beginning of the second half. This shift in market
expectations was reflected in further rises in Treasury bond yields, as the yield on ten-year
bonds reached 4.67% yesterday, the highest since last November.

While today’s numbers helped reduce the yield gap between ten-year Treasury bonds and
British government bonds to 0.354% after reaching 0.408% last week.