Sterling Hits Two-Month Peak as Dollar Loses Ground on Fed Rate Cut Outlook

The British currency, pound sterling, reached a two-month apex on Monday buoyed by investor anticipations of significant rate cuts by the U.S. Federal Reserve next year, which in turn weakened the U.S. dollar. Concurrently, the pound saw a dip against the euro to its lowest level since the early days of May.

Britain's currency was provided a slight boost from an uptick in gilt yields, which came after Prime Minister Rishi Sunak hinted at future tax cuts following a drop in inflation. This statement came as a precursor to the new budget update due later in the week from Finance Minister Jeremy Hunt, who is expected to outline his strategies for jumpstarting the economy. The pound saw a marginal increase of 0.1% for the day, trading at $1.2475, after experiencing an earlier surge of up to 0.39% reaching $1.2511, marking its highest since September 13.

Against sterling, the euro gained 0.1%, being traded at 87.61 pence, closely beneath the day's high of 87.70, its strongest position since the early-May period. Hunt has made clear over the weekend that he won't introduce tax cuts that could ignite inflationary pressures. Upcoming official forecasts, to be released on Wednesday, are expected to afford Hunt more leeway for financial incentives without breaching fiscal rules, compared to the yearly budget released in March. There has been speculation regarding the types of tax cuts being considered, including potential inheritance tax reductions and possibly adjustments to income tax and national insurance geared towards aiding low-income workers. ING strategist Chris Turner does not expect these changes to significantly influence the Bank of England's rate trajectory, which is anticipated to begin a decrease by next August.

Yields on benchmark 10-year gilts were higher by 5 basis points, closing the day at 4.153%, though they underperformed in comparison to increases seen in U.S. Treasuries and German Bunds. Money market projections reveal traders anticipate the Bank of England to lower rates by approximately 80 basis points over the course of 2024, an increase from the 60 basis points anticipated just a week prior.

The U.S. dollar experienced a fall, touching milestone lows against the euro, yen, and other key currencies on Tuesday, influenced by a stronger yuan set by China's central bank. This led to the euro climbing 0.2% to reach $1.0963, the highest seen since mid-August, and saw the yen appreciate over 0.5%, hitting a seven-week high against the dollar. The New Zealand and Australian dollars also rose, reaching three-month peaks. Part of the dollar's softness could be attributed to China's firmer currency stance, alongside reports of forthcoming support for China's property sector, which improved overall market sentiment.

The dollar index, illustrating the currency's strength against a basket of six major currencies, dropped to a 2-1/2-month low, while Sterling escalated 0.3%, hitting a two-month peak of $1.2540. Anticipation builds around the release of the Federal Reserve minutes, which will give further insight into the future of U.S. interest rates.

The South African rand saw a decrease in value on Monday, as investors awaited the country's inflation data and interest rate decision later in the week. The rand traded about 0.3% lower against the dollar. Local stock and bond markets showed slight improvements, following S&P Global's reaffirmation of South Africa’s foreign and local currency ratings.

Global markets have seen a general uptick, with Asian shares reaching two-month highs and Wall Street experiencing a rally. These market movements are a reflection of investors betting on an end to the Fed's interest rate hikes and the possibility of rate cuts next year. However, the sentiment remains cautious with concerns that fresh economic data might alter this monetary policy outlook. Oil prices, on the other hand, have softened as recession worries dampen demand forecasts, outpacing supply cut expectations from OPEC and allies.

Sterling, Dollar, Fed