Above: Megan Greene speaks to Bloomberg TV on April 22.
A strengthening Pound lowers imported inflation.
The Pound's strength against the Dollar has surprised economists, including Megan Greene of the Bank of England.
The Monetary Policy Committee (MPC) member said in a television interview that a falling dollar would be disinflationary for the UK, even if it is still too early to say "where the dust settles".
"GBP/USD has risen 2% since what U.S. President Donald Trump branded "Liberation Day". This was acknowledged by Greene, who noted that U.S. tariffs represent a more disinflationary risk than an inflationary one for the UK," says Justin McQueen, a Reuters market analyst.
During a testimony before UK lawmakers in March, Greene said that if the U.S. were to impose tariffs on the UK, economic theory would suggest that the dollar would appreciate versus the pound, which would therefore put upward pressure on UK inflation.
However, the opposite has transpired, and the Dollar on Tuesday fell to its lowest level in three years, allowing the Pound-Dollar exchange rate to rally to above 1.34, a seven-month high.
A strengthening Pound and falling Dollar means UK imports become cheaper, which presents a deflationary force in the UK economy, as the UK imports more than it exports.
"If the dollar continues to depreciate on balance, that would be disinflationary for the UK," she said.
McQueen says Greene's comments about the currency offer markets "some dovish nuggets" for Bank of England watchers.
Above: GBPUSD at monthly intervals. Sterling is stronger than the Bank of England's most recent forecasting assumptions allowed for.
He explains that for traders, "this hints that the risk-reward in positioning for a more dovish BoE May meeting is favourable and has likely gained more traction since the European Central Bank decision."
Markets are currently fully priced for a rate cut in May, but the tone and guidance of the meeting will be more important for currencies than the cut itself.
The Pound could come under some pressure were the Bank to point to easing inflationary pressures, which would open the door to additional rate cuts in the pipeline.
The Pound would be particularly susceptible to losses against the Euro, given that relative monetary policy considerations are more important for the Pound-Euro rate than the tariff-sensitive Pound-Dollar.
Greene is considered a 'hawkish' member of the Bank's MPC, meaning any softening in her stance is worthy of attention.
However, analysts at Bank of New York Mellon (BNY) don't think Green is ready to shift stance yet, noting that she also thought UK wage growth was still "pretty high" and there was "no sign of shakeout" in the U.K. labour market yet.
She remains concerned about the rise in inflation expectations in the U.K. and the fact that services sector prices point to "inflation persistence" in the country.
"Her comments do not preclude a cut at the upcoming meeting, but given the supply pressures in the country, we expect the BoE to emulate the ECB in not committing to a sustained easing
cycle," says a note from BNY.
If this assessment is correct, the Pound can depend on the Bank of England's predictable and cautious approach to monetary policy for ongoing support.
"The UK’s sticky inflation has kept policy rates higher than in most other G10 countries at a time of sluggish growth, providing support for GBP," says Clyde Wardle, Senior EM FX Strategist at HSBC.
We recently heard a more 'dovish' tone from MPC members Sarah Breeden and Clare Lombardelli who appear to be concerned about slowing UK growth dynamics, which implies scope for faster rate cuts than the current once-per-quarter pace.
The Bank's next decision is on May 8, but before then, Bank Governor Andrew Bailey and Chief Economist Huw Pill will give their views.