The British Pound Sterling experienced a notable decline following the Bank of England's (BoE) decision to maintain its policy rate in a move described as a 'hawkish hold,' with a second Monetary Policy Committee member advocating for a rate hike. Despite this, Sterling fell below the 1.3300 level to its lowest since early April, nearing 1.3200, as market participants focused on softer headline inflation and cheaper crude oil prices, which masked underlying inflationary pressures [1]. Headline UK inflation for May remained flat at 2.8%, undercutting market expectations of 3.0%, with food inflation dropping to 2.2%, its lowest since December 2024. However, services inflation, closely watched by the BoE, surged to 3.7% from 3.2%, and core inflation edged up to 2.6%. Regular pay growth persisted at 3.4%, supporting the case for further tightening [1].
The market reaction was driven in part by external factors, as the US Federal Reserve, under new Chair Kevin Warsh, also delivered a hawkish hold, increasing the likelihood of a September rate hike and pushing the Dollar Index (DXY) to a two-month high. This shift in rate differentials favored the US Dollar, leading to a trimming of BoE rate hike bets and further weakening the Pound. Domestic political uncertainty, including the Makerfield by-election and leadership speculation, added to the downward pressure on Sterling and UK government bonds (gilts) [1].
In the currency markets, GBP/JPY retreated by 0.21% during the North American session, trading at 213.11 after reaching a high of 214.06. Technical analysis indicated a neutral bias for GBP/JPY, but recent momentum favored further downside, with the pair testing key support at the 100-day Simple Moving Average (SMA) at 212.79. The Relative Strength Index (RSI) pointed lower at 41.68, suggesting potential for continued declines. If GBP/JPY breaks below the 199-day SMA, the next support levels are 211.26 (May 18 low), 210.45 (April 30 low), and the 200-day SMA at 209.32. Conversely, a move above the 50-day SMA at 214.25 could see buyers target 215.00 and 216.00 [2].
A weekly currency heat map showed the Japanese Yen as the strongest performer against the British Pound, with GBP/JPY down 0.96% for the week. The Yen also gained against other major currencies, reflecting broad-based strength [2].
The BoE warned that inflationary pressures from the closure of the Strait of Hormuz, which disrupted a third of the world's seaborne fertilizer trade and drove nitrogen prices up by around 80% at the peak, have yet to fully pass through to consumer prices. The central bank's projections anticipate higher inflation in the second half of the year due to energy and food costs, despite the temporary relief from cheaper spot crude oil [1].
CONCLUSION
Despite the Bank of England's hawkish stance, the British Pound weakened due to softer headline inflation, cheaper oil, and a stronger US Dollar, while technical and fundamental factors also favored Yen strength. The BoE cautioned that underlying inflationary pressures remain, with further increases expected later in the year. Market sentiment remains negative for Sterling in the near term, with downside risks persisting.