European currencies have been resilient against the dollar during May with the Pound to Dollar (GBP/USD) exchange rate able to make limited net headway to just below the 1.2600 level.
ING expects relatively low volatility will continue which will help cushion the Pound, but Bank of England (BoE) rate cuts will hold GBP/USD to 1.25 on a 6-month view.
ING considers that the next UK inflation reading later this month will be crucial for the BoE with favourable data needed for Governor Bailey to convince a majority that a rate cut is justified.
Overall, it narrowly expects the first rate cut in August, but would not be surprised if it was in June.
The bank still sees scope for the BoE to cut rates faster than the US Federal Reserve given UK fundamentals.
In this context, it expects that the Pound will be vulnerable once rate cuts get underway.
As far as the US is concerned, ING expects the economy will slow, but also expects that stubborn inflation will limit scope for Fed rate cuts with the first reduction in September.
In this context, dollar losses in global markets are likely to be limited.
Looking ahead to the US Presidential election, it expects a Trump victory would be more positive for the US dollar.
Key Quotes:"Governor Andrew Bailey would like to join two fellow MPC members in voting for a cut."
"A June rate cut is now priced with a 60% probability."
"Our slight preference is for August."
"We look for sterling underperformance from here."
"The UK is running a negative output gap – making the BoE far more likely to cut rates earlier and deeper than the Fed."