GBP/USD rebounded by 0.8% to 1.3434 overnight, recovering from last week’s 2.2% sell-off to 1.3326. The relief rally was backed by a 7.4 bps drop in the 10Y Gilt yield to 5.1% after Andy Burnham ruled out changes to the Chancellor’s self-imposed fiscal rules, such as exempting defence spending. By maintaining these rules, the leading contender to replace Prime Minister Keir Starmer eased market fears of repeating the 2022 mini-budget crisis amid global inflationary pressures. However, Burnham must first become a sitting Member of Parliament before he can legally challenge Starmer or accept the Labour Party leadership. To achieve this, he must win the Makerfield by-election on June 18, where he faces a formidable challenge from a resurgent Reform UK. If he wins, nominations close in early July, followed by a Labour Party leadership election in early to mid-August, by which time, the US midterms will likely take centre-stage.
Meanwhile, the OIS market has priced in a 58% chance of a Bank of England hike before the Fed at the July 30 meeting. BOE Chief Economist Huw Pill was the lone dissenter at the last meeting, calling for a prompt rate hike sooner rather than later. Under its baseline scenario, the BOE projects modest and manageable second-round effects on inflation from elevated energy prices around USD108 per barrel, which would lift CPI inflation to 3.7% by the end of 2026, close to 3.75% bank rate, and may require 1-2 hikes by late autumn to return inflation to the 2% target. Alternatively, the BOE’s optimistic scenario allows for a rate pause if oil prices recede on a diplomatic resolution to the Iran conflict. However, if a prolonged conflict materialises and lift oil prices to new highs, the BOE will likely act to avoid falling behind the curve on inflation as it did in 2022.
For now, attention will also fall on US President Donald Trump swearing in Kevin Warsh as the Fed Chair on May 22 at the White House. If Trump demands a June rate cut, the USD could decline by putting Warsh on a collision course with a divided Fed. Hence, it remains to be seen if GBP/USD will extend its decline into the lower half of its post-Liberation Day range between 1.30 and 1.38.
Quote of the Day
“One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man.”
Elbert Hubbard
May 19 in history
In 1952, Time magazine featured "Theseus," an electrical learning machine built by American scientist Claude Shannon, as the first example of Artificial Intelligence.
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