Synopsis:

CIBC expects the pound to face positioning adjustments in August as the Bank of England (BoE) continues its cautious easing cycle, but sees any GBP/USD dips as opportunities to add longs, with an eye on a move back toward the September 2021 highs near 1.39 into year-end.

Key Points:

• Gradual BoE Easing Path:
  • The unexpected three-member vote for an immediate cut at the June MPC, including Deputy Governor Ramsden’s support, reinforces a gradual easing bias.
  • CIBC expects the BoE to deliver a 25bp cut in August, with more cuts in November and February, taking the bank rate to 3.50% (neutral) by Q1 2026.

• Labour Market and Inflation Dynamics:
  • Clear signs of labour market loosening, as highlighted by Bailey, add to easing expectations.
  • Even with inflation projected to stay above 3% in 2025, the BoE appears committed to progressive rate cuts.

• Fiscal and Macro Backdrop:
  • Fiscal uncertainty could keep market pricing volatile, especially post-autumn budget.
  • Q1 growth momentum is fading as consumer sensitivity to higher prices and taxes bites, but positive PMIs and earnings trends suggest resilience.

• Market Positioning and Gilt Yields:
  • The UK economic surprise index is correcting from near one-year highs, implying near-term consolidation.
  • 10-year Gilt yields drifting higher within their range suggests fiscal worries remain contained for now.

Conclusion:

CIBC maintains that while GBP/USD may see positioning-driven pullbacks, underlying resilience in activity and the BoE’s measured easing approach should keep the pound supported. Any dips are viewed as buying opportunities, with 1.39 still their year-end target as GBP/USD works back toward multi-year highs.