Sterling Hits Two-Month High as Rate Cut Speculations Weaken Dollar

The British Pound Sterling registered a significant rise, reaching a two-month peak against the U.S. dollar on Monday. This surge was largely driven by market expectations of potential steep interest rate cuts by the U.S. Federal Reserve in the coming year, which in turn diminished the dollar's appeal. Despite this, the pound experienced a decline when pitted against the euro, touching its least favorable point since early May.

GBP's Rise Amidst Global Currency Fluctuations

Gilt yields gave a slight boost to Sterling after UK Prime Minister Rishi Sunak suggested that tax reductions would follow the anticipated drop in inflation. This statement came just before the finance minister Jeremy Hunt is expected to present an interim budget, aimed at revitalizing the UK's sluggish economy. The pound saw a modest 0.1% increase at $1.2475, with an earlier climb reaching $1.2511, marking the highest since mid-September.

On the other side, the euro noted a 0.1% rise against the pound at 87.61 pence, just under the day's peak. Hunt refuted the possibility of tax cuts that could stoke inflation over the weekend. Predictions suggest that Wednesday's official reports will likely indicate Hunt has greater leeway with fiscal policy than previously anticipated.

Market Reactions and Outlooks

Financial strategists ponder over potential tax cuts, including reductions in inheritance tax and possibly even income tax and national insurance, which would particularly benefit lower-income workers. However, experts do not foresee this impacting the Bank of England's rate policy, where there's an expectation that interest rates will reduce starting next August. This anticipation is seen as positive for Sterling, which could push GBP/USD rates up further during the week.

Money market projections suggest that the Bank of England may lower interest rates by roughly 80 basis points over 2024, a more aggressive forecast than just a week prior. Amidst these financial developments, yields on benchmark 10-year gilts were up, trailing behind U.S. Treasuries and German Bunds. Notably, the Fed is also anticipated to release minutes from their recent meeting, which will provide valuable insights into future rate movements.

Sterling, Dollar, Fed