The pound sterling has staged a strong recovery at the start of this week, outperforming other major currencies after a sharp sell-off in currency markets last Friday. The pound fell on Friday after UK retail sales fell at a faster-than-expected pace in October, while the S&P Global/CIPS Composite Purchasing Managers’ Index (PMI) for November fell below 50.0 for the first time since October 2023.
The pound’s recovery is mainly due to strong market expectations that the Bank of England may be among the Western central banks to adopt a more dovish monetary policy. Traders expect the BoE to keep interest rates unchanged at 4.75% at its December meeting, with a possible 75 basis point cut to 4% by 2025, Reuters reports.
On the other hand, data from the Office for National Statistics (ONS) showed retail sales fell by 0.7% month-on-month, as shoppers avoided spending ahead of the new government’s first tax and spending budget on October 30. The composite PMI also fell below 50.0, indicating a slump in the services sector and a decline in manufacturing activity.
In his comments, Chris Williamson, chief economist at S&P Global Market Intelligence, stressed that the results of the post-budget economic survey were not promising. However, the Bank of England’s deputy governor, Claire Lombard Elli, warned against making hasty decisions based on a single report, stressing that the approach to easing policy would be gradual.
In contrast, the Bank of England’s Monetary Policy Committee member, Swati Dhingra, expressed her support for a less gradual approach to interest rate cuts, noting that inflation in the UK is not significantly different from other advanced economies, and that current monetary policies are weighing on investment.
Daily Markets Brief: Pound sterling rises, US dollar falls
The pound sterling started Monday strongly against the US dollar (USD), as it sought to extend its recovery and break the key resistance level at 1.2600. The GBP/USD pair saw a rise at the start of the week, with the US Dollar Index (DXY) down 0.5% near the 107.00 level.
The US 10-year Treasury yield also fell to 4.33% as markets reacted to President-elect Donald Trump’s decision to nominate Scott Bessent as Treasury Secretary to oversee economic and tax policy. Despite some negative reactions, analysts expressed their satisfaction with the appointment, noting that it may be a suitable option to contain economic concerns related to tariffs.
In a statement to the Wall Street Journal, Bessent confirmed that he will focus on implementing policies related to tariffs, reducing spending, and maintaining the US dollar’s status as the global reserve currency.
In the context of economic data, the results of the global purchasing managers’ index for November showed a significant improvement in the US economic outlook, as the composite index rose to 55.3, its highest level in 31 months, thanks to a recovery in the services sector and a slowdown in the contraction in the manufacturing sector.
As for monetary policy expectations, markets are divided on the likelihood of the Fed taking further action at its upcoming meeting in December.
Technical Analysis: sterling /dollar struggles to break above 1.2600
The pound sterling faced some challenges in climbing above 1.2600 after falling below the psychological support at 1.2500 against the US dollar. Despite its current recovery, some traders may use this bounce to build new short positions, as the overall downtrend continues. The 200-day exponential moving average (EMA) points to a resistance level near 1.2800.
Disappointing economic performance in the UK and its impact on the financial future
The British Prime Minister pledged to achieve sustainable economic growth of 2.5% annually and improve living standards, in the face of major challenges for the economy that has been suffering from stagnant productivity since the global financial crisis in 2008. According to the latest economic reports, inflation in the United Kingdom accelerated more than expected in October, as consumer prices rose by 2.3% compared to last year, driven by higher energy bills. At the same time, inflation in the services sector remains high at 5%, reflecting the ongoing pressures on the domestic economy.
The British economy is also facing increasing unemployment rates, as many citizens struggle to find stable jobs, which increases the burden on British families. With inflation remaining high, consumers’ purchasing power is negatively affected, leading to a decline in consumer spending, which is one of the main drivers of the economy.
This is in light of strong economic growth in the United States and the continuation of policies that support this growth, while the British economy faces additional challenges, such as huge tax increases and raising the minimum wage, in addition to the burdens resulting from amendments to labor laws.
Bank of England Policy Expectations and Future Market Trends
In terms of monetary policy, markets have shown an increase in investor expectations about the number of interest rate cuts that the Bank of England may make next year, raising expectations from two to three. The probability of a December rate cut remains low, but the Bank of England plans to implement a significant rate cut in February 2025. The move aims to stimulate economic growth and ease inflationary pressures, though it may indirectly affect the value of the pound sterling and increase challenges for financial markets.
