Bank of England rate cut in September will decline – renewed hopes of narrowing the interest rate gap between Britain and the United States
The pound rose in the European market on Tuesday against a basket of global currencies, extending gains for the fifth consecutive day against the US dollar, hitting the highest level in a week, after British labor market data showed an unexpected decline in the unemployment rate in United Kingdom in June.
The data reduced the chances of the Bank of England cutting British interest rates in September, renewing hopes that the interest rate gap between Britain and the United States would shrink again. Price Outlook • GBP exchange rate today: The pound rose against the dollar by 0.3% to ($1.2813), the highest in a week, from the opening price of trading at ($1.2774), and recorded the lowest level today at ($1.2762).
The pound ended Monday’s trading up 0.1% against the dollar, in the fourth consecutive daily gain, benefiting from the slowdown in the levels of the US currency in light of the decline in long-term Treasury yields in the United States.
The Office for National Statistics said in United Kingdom that the unemployment rate fell to 4.2% in June, from 4.4% in May, contrary to market expectations rising to 4.5%.
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This decline was achieved by an increase of 54,000 jobs in May, which was followed by an increase of 16,000 jobs in June, bringing the total employment gains for the year to 241,000 jobs, equivalent to about 0.8% of the labor force.Average wage growth also slowed to its lowest level since January 2021 when bonuses were included, but the decline was less than expected if annual and individual bonuses were included in the comparison.
Wages rose 4.5% year-on-year in June when bonuses were included, down from 5.7% previously, and 5.4% year-on-year if bonuses were excluded down from 5.8% in May, above market expectations and a 4.6% year-on-year increase.
The Bank of England is closely monitoring average wage growth as it is considered a key indicator of inflation and the risk of it continuing at a higher than target level over the coming years.
Inflation fell to the 2% target in May and remained stable in June, but core statistical effects are expected to lift it to 2.3% when July data is released on Wednesday.
The Bank of England remains concerned about the high level of inflation in the services sector, which remained at around 5.7% in June. The fear is that this will support overall inflation at a higher level than the target.
Following the above data, interest rate swaps in United Kingdom showed a chance of less than 50% of the Bank of England’s rate cut in September, and swaps also show a chance of around 60% of UK interest rate cuts in November.
US interest rate according to CME Group’s FeedWatch: The pricing of the prospects of a 50 basis point cut in US interest rates at the September meeting is currently stable at 49%, and the pricing of the prospects of a cut by about 25 basis points at 51%.
The current gap in interest rates between United Kingdom and the United States at 50 basis points in favor of US interest rates as the highest gap since May 2023, and in light of the above possibilities, the gap is expected to narrow to at least 25 basis points next September, which enhances investment opportunities in the British pound against the US dollar.
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