Pound Sterling Weekly Fundamental Forecast: Neutral
- Fiscal support to ease BoE’s burden of hiking into weakness
- UK retail sales and US inflation are major event risks next week
Source: TradingView, prepared by Richard Snow[1]
UK Finance Minister Sunak Allows the BoE More Breathing Room
At the Bank of England[2]’s last meeting on the 4th of May, members of the Monetary Policy Committee (MPC) voted 6-3 in favor of a 25 basis point hike with the other 3 in favor of a 50 bps hike. Since then, annual CPI inflation[3] jumped from 7% in March to 9% in April as the harsh consequences of the war in Ukraine exacerbate existing supply chain issues. Russian oil[4] accounts for around 8% of the UK’s oil[5] imports and the island kingdom is committed to phasing this out by the end of the year.
In a response to the cost-of-living squeeze, UK finance minister Rishi Sunak announced a £15 billion package to assist low-income households with the rising cost of energy and food prices. The package is estimated to be partially financed through a special windfall tax on energy companies which is estimated to be around £5 billion.
The targeted fiscal support provides the BoE with a slight buffer as it faces no other choice than to hike into weakness. Rate hikes are the Bank’s only real tool to fight supply side inflation and comes at the cost of lower economic activity and lower growth (GDP[6]).
The neutral stance of this forecast emanates form a softer US dollar[7] and a deteriorating UK outlook. Positive NFP[8] data hardly provides more impetus for the dollar as a strong labor market has
