Money market pricing and short-term trading signals are influencing the Bank of England's potential rate cut later in the summer. Economists and strategists are offering contrasting predictions regarding both interest rates and the pound.
According to the latest CFTC data, speculators have increased their reserves in pound sterling, resulting in record-high net long positions. Swaps markets indicate that the initial 25 basis points cut may not occur until August.
Sterling has emerged as the leading G10 currency against the dollar this year. While the Bank of England is expected to maintain rates at 5.25% this week, economists anticipate the possibility of an earlier rate cut than what traders anticipate.
Bruna Skarica, chief UK economist at Morgan Stanley pointed to softer-than-expected payroll data released last week as justification for potential rate cuts in May.
Barclays and Capital Economics anticipate a rate cut in June. Meanwhile, strategists at Rabobank suggest that traders align with the Bank of England's hawkish stance.
Economists are questioning whether the central bank's projections could be inaccurate once again, and what the pace of policy adjustments might be if such expectations prove to be wrong.
The Bank of England anticipates a decline in price growth to its 2% target in the second quarter, followed by a rise to nearly 3% later in the year.
Paul Dales, Chief UK Economist at Capital Economics, predicts that headline UK inflation will eventually decrease to 1.6% and drop to below 1% by year-end.
According to Dales, "the Bank might switch quite quickly to worrying about inflation being too low." He forecasts that the pound will decline to $1.20 by the end of the year from its present level of $1.27. Economists surveyed by Reuters anticipate that inflation will decrease to 3.6% in February.
Societe Generale's Keith Jax is uncertain whether the pound can sustain its strength against the dollar following colder-than-anticipated US data.
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