The Pound sterling fell on Monday as investors focused on the strength of the US economy, helping to boost the dollar. Sterling was down 0.2% in late trade at $1.3024, close to a two-month low of $1.2975 hit on Thursday. The euro, meanwhile, rose 0.1% to 83.35 pence, though it remained close to a two-and-a-half-year low against the British pound.
The US dollar has been strong in recent weeks as the US economy has outperformed expectations. Data last week showed retail sales grew more than expected in September and jobless claims fell the previous week, helping investors scale back expectations of a Federal Reserve rate cut and pushing up US Treasury yields.
In contrast, Britain saw inflation fall more than expected, falling to 1.7% in September, below the Bank of England’s 2% target. This has led traders to increase their expectations of a rate cut in the UK. UK 10-year yields also fell below their US counterparts for the first time since mid-August, making US bonds look more attractive to investors, boosting the dollar.
This week, investors will be looking to Bank of England Governor Andrew Bailey, who is due to speak tomorrow, as well as private sector PMI data for October. Chris Turner, head of global markets at ING, noted that the market is still discounting expectations for the BoE’s easing cycle, warning that any signals from Bailey about increasing the pace of easing could weigh on sterling.
Turner added that the PMI data, due out on Thursday, October 24, will play a crucial role in determining the direction of sterling, whether it continues to perform well or is affected by the BoE’s dovish rhetoric.
The impact of interest rate cut expectations on the pound sterling
The pound sterling (GBP) was slightly lower against its major counterparts at the start of the week, weighed down by strong expectations that the Bank of England (BoE) will make a significant interest rate cut. Over the past few weeks, investors have been wary of such expectations. However, strong UK retail sales data for September has changed the picture, with sales rising by a surprising 0.3% on-month, while economists had expected a decline.
Before the retail data, traders were pricing in a rate cut by the Bank of England during the remaining policy meetings this year, due to a marked slowdown in inflation. But the positive retail sales data could dent these expectations, increasing the chances of a rate cut in December.
For a clearer view of the future of interest rates, investors will be focusing on a series of important speeches from Bank of England Governor Andrew Bailey, Sarah Breeden and Megan Green, which are expected to be delivered on Tuesday. Bailey will also speak several times during the week, providing further clarity on the direction of monetary policy.
On the economic front, investors await the preliminary October PMI data from S&P Global/CIPS, set for release on Thursday. Analysts expect the data to show a slowdown in business activity, potentially hurting the market’s outlook on the British pound. Technically, the pound sterling is trading at 1.3024 during the American session, as the short-term outlook for the GBP/USD pair remains bearish, with the price remaining below the 50-day exponential moving average (EMA) which is hovering around the 1.3090 level. The 14-day Relative Strength Index (RSI), which is around 40.00, indicates further downside momentum in case of an additional downside break.
Daily Market Movers: GBP Under Pressure
The British pound fell sharply to near 1.3020 against the US dollar during the North American session on Monday. The GBP/USD pair continues to face downward pressure as the US dollar resumes its advance after a slight correction on Friday. The dollar has been supported by expectations that the Federal Reserve’s monetary policy easing cycle will be more gradual than previously anticipated. The CME FedWatch tool shows that Fed Funds Futures data expects the US central bank to cut interest rates by 50 basis points for the rest of the year. This suggests a 25-basis point cut at the November and December meetings. The Fed appears to be adopting a cautious approach to policy easing, given the positive data released in September, which helped reduce the risks associated with a slowing US economy.
However, Atlanta Fed President Raphael Bousik said on Friday that he expects only one rate cut in the remaining meetings this year. Bousik explained that the federal funds rate could head toward 3% and 3.5% by the end of 2025, indicating that he is in no rush to reach this neutral level.
Meanwhile, the evolution of speculation about the US presidential election will significantly influence the markets’ reaction to the US dollar. Currently, Vice President Kamala Harris leads national polls, ahead of former President Donald Trump, according to the Emerson College Poll. These dynamics will continue to shape market trends, making it crucial to monitor political and economic developments in the coming period.
