Sterling Slips as Bank of England Holds Rates; Hawkish BOJ Policymakers Pause Yen Slide

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The pound weakened after the Bank of England (BoE) hinted at a possible interest rate cut while contrasting hawkish views from Bank of Japan (BOJ) members slowed the yen’s decline. Meanwhile, the dollar index gained traction as investors shifted focus to upcoming U.S. inflation data and its implications for Federal Reserve policy.

While the BoE kept its benchmark interest rate steady at 5.25%, a second official on the Monetary Policy Committee supported a rate cut, signaling a potential shift towards lower interest rates. Deputy Governor Dave Ramsden, alongside Swati Dhingra, voted in favor of a reduction to 5%. Sterling initially dipped to a two-week low but later stabilized at $1.2505 after the BoE’s announcement.

BoE Governor Andrew Bailey hinted at future rate cuts, suggesting that policy might need to become less restrictive over the forecast period. However, a final decision will depend on forthcoming data before the June meeting. Market expectations lean towards a rate cut in August, with a 75% chance, while the likelihood of a June cut stands at 45%.

Conversely, the dollar saw modest gains against the yen after a significant decline last week, supported by hawkish sentiments from BOJ members advocating for steady interest rate hikes. The yen remained stable at 155.62 per dollar. In contrast, Japan’s top currency diplomat reiterated Tokyo’s readiness to intervene in the currency market, particularly after last week’s substantial yen depreciation.

Looking ahead, investors anticipate U.S. producer and consumer price index data next week for insights into inflation trends and their potential impact on Fed policy. Meanwhile, China’s offshore yuan remained steady amid reports of growth in exports and imports for April, suggesting a possible delay in anticipated rate cuts aimed at meeting the country’s 2024 GDP target.