British pound edges up on Rishi Sunak's cabinet reshuffle

Pound sterling up as UK PM Rishi Sunak brings back David Cameron

The British pound traded above $1.22 against the U.S. dollar on Monday, up 0.3% on the day as markets reacted to a dramatic cabinet reshuffle by UK Prime Minister Rishi Sunak.

In response to her criticisms of the police's handling of a pro-Palestinian march over the weekend, Sunak replaced his home secretary, Suella Braverman, with James Cleverly. David Cameron, the former UK PM, assumed the role of the UK foreign secretary. The appointment marked Cameron’s comeback to front-line politics after stepping down after six years at No. 10 Downing Street in 2016.

The return of a former Prime Minister to the cabinet in a reduced role is an exceedingly rare occurrence — the most recent time it happened was in the 1970s, when Conservative former PM Alec Douglas-Home assumed the position of Foreign Secretary. Cameron was also made a Baron, as British tradition dictates that any member of the cabinet must be an MP or a peer.

“With the Conservatives trailing Labour by more than 20 points in opinion polls, the reshuffle represents Sunak’s last throw of the dice in terms of building a team ahead of the next election,” the Financial Times wrote on Monday.

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Bank of England: Catherine Mann says climate change to boost inflation

Remarks from Bank of England (BoE) board member Catherine L. Mann indicated that climate change was likely to boost inflation, which would in turn impact monetary policy:

"The research […] points to increased inflation, increased inflation persistence, and increased inflation volatility associated with climate shocks, policies, and spillovers," she said in a speech published by the Bank of England.

Mann was among a minority of three members on the Monetary Policy Committee who voted this month for the BoE to increase its main interest rate from 5.25% to 5.5%.

Mann’s remarks followed last week's statements from the bank's Chief Economist Huw Pill, who said market pricing indicating a potential interest rate cut in August 2024 "doesn't seem totally unreasonable". Pill’s remarks were quickly shut down by BoE Governor Andrew Bailey, who said it was “too early to be talking about cutting rates”.

Investors are also anticipating key data releases on UK inflation, retail sales, and unemployment scheduled for later in the week.

UK inflation rate: CPI reading to be released on Wednesday

Investors in UK assets face a more immediate concern with the release of the Consumer Price Index (CPI) for October on Wednesday. Economists surveyed by Reuters anticipate a year-on-year increase of 4.8%, a notable decline from September's 6.7% surge.

A reading of 4.8% would mark the smallest in two years, reflecting a slower pace or even a decrease in the cost of essential items like energy and food in recent months. Looking ahead to next week, Finance Minister Jeremy Hunt will present the autumn budget.

Hunt, who retained his position in Sunak's reshuffle, mentioned on Friday that the autumn statement, scheduled for November 22, would prioritize reducing inflation to stimulate economic growth. This follows data indicating that the UK's economy avoided a recession in the July-September period but failed to show growth.

The recent reshuffle represents another reset for the prime minister, who is contending with his party's significant lag behind the Labour Party ahead of the anticipated election next year. The return of David Cameron suggests that Sunak aims to bring in more centrist, experienced figures rather than catering to the right-wing faction of his party that supported Suella Braverman.

GBP to USD rate: Pound rises against dollar as BoE expected to cut rates by May

Geoff Yu, senior macro strategist at BNY Mellon, told the Reuters news agency that the reshuffle had little to no impact on the pound to dollar rate:

"Cabinet reshuffles are a domestic political issue. Any shift in the finance ministry is unlikely, so for sterling, the outlook is really about the dollar."

The DXY dollar index, which measures the strength of the greenback against a basket of other major currencies, has held steady ahead of upcoming U.S. inflation and retail sales data.

The pound’s 0.2% gain can likely be attributed to a prediction from investment bank Morgan Stanley, which forecast that UK policymakers will likely lower interest rates to 4.25% by the end of the next year — despite the BoE’s assurances of it being “too early” to cut rates.

In a note to clients, Morgan Stanley anticipated the UK entering a technical recession by the year-end, projecting a 0.1% contraction in the economy in 2024 before showing 1% growth in 2025. Meanwhile, current forecasts in financial markets suggest that rates will be cut to 5% by June next year.

EUR to GBP rate: ING says “weakness” emerging in sterling

Chris Turner, Head of Global Markets at Dutch bank ING, wrote that the euro to pound exchange rate could tilt in favour of the euro in the coming days:

“There does appear to be a little independent weakness emerging in sterling, although the Bank of England's trade-weighted index is only off around 0.6% over the last few days. Quite a large 1.7% MoM drop in UK house prices (Rightmove) will not have helped sterling either.

Both the last wage and CPI releases emerge before the 14 December BoE rate meeting. Private sector wage data could be a little sticky on Tuesday, although the BoE has recently been downplaying this. Wednesday's release of October CPI should meet Prime Minister Rishi Sunak's goal of sub-5% as the energy tariff adjustment comes through.

0.8800 looks to be the risk for EUR/GBP this week, once resistance at 0.8750 yields.”

At the time of writing on Monday, the pound to dollar rate traded at $1.2268, up 0.35% on the day, as per MarketWatch data. The euro to pound rate stood at 0.8726, with sterling gaining close to 0.2% against the European common currency.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.