Societe Generale strategists report that dip buying in Sterling has kept GBP/USD trading above its 200-day moving average of 1.3403, despite ongoing pressure on UK Gilts. The currency pair is currently fluctuating within a 1.3400–1.3500 range as investors focus on the recent appointment of Chancellor John Healey and anticipate the release of UK CPI data for June, scheduled for tomorrow [1].
Societe Generale's economics team forecasts a modest easing in inflation, with headline CPI expected to dip to 2.7% year-over-year from 2.8%, which is below the Bank of England's estimate. Services inflation is also projected to decrease slightly to 3.6% from 3.7%, while core inflation is anticipated to remain unchanged at 2.6% [1]. Recent wage data, specifically a small decrease in private sector pay to 2.9% year-over-year, was not a significant market mover for the Bank of England but is seen as a minor relief in the ongoing debate about inflation and the risk of second-round effects [1].
On the fiscal side, public borrowing declined by £4 billion between May and June, attributed to reduced debt interest payments. However, the deficit is running £2.7 billion ahead of the Office for Budget Responsibility's forecast for the April to June period, due to an overshoot in spending by £3.6 billion, even as receipts are up 7.2% year-over-year [1]. The premium of Gilts over Bunds remains close to the highs seen during the Truss government crisis in September 2022, at 140 basis points, though this has tightened from just over 170 basis points at the end of 2024 [1].
Looking ahead, Societe Generale suggests there is potential for further tightening of the Gilt-Bund spread if the new chancellor can steer public finances towards greater stability in the autumn budget. The structurally higher level of inflation in the UK compared to the eurozone is highlighted as a key factor for bond markets. Political stability, which has been scarce since the 2016 EU referendum, could encourage more bullish sentiment towards Gilts, provided inflation and government spending are brought under control [1].
CONCLUSION
Sterling remains supported as investors await key UK CPI data and assess the fiscal direction under the new Chancellor. While inflation is expected to ease modestly, fiscal challenges persist, and market participants are watching for signs of improved stability and discipline in the upcoming autumn budget.