Pound Surges on Anticipation of Delayed Rate Cuts

The British pound performed well on Friday, rising against the dollar and the euro, driven in particular by remarks from a member of the Bank of England (BoE) and inflation forecasts in the United Kingdom suggesting the persistence of high interest rates.

Around 11:55 a.m., the British currency recovered after its fall the day before, climbing 0.20% to 1.2649 dollars, and gaining 0.17% against the euro to 86.10 pence.

Thursday evening, a member of the BoE, Megan Greene, “remained firmly in favor of a further increase in the BoE’s key rate”, underlined Derek Halpenny, analyst at MUFG.

“In order to sustainably bring inflation back to its target” of 2% in the United Kingdom, the BoE’s Monetary Policy Committee (MPC) “must put into perspective the risk of doing too little with that of doing too little. too much”, declared this member with a tone usually known to be offensive, who spoke in Leeds.

Furthermore, a BoE survey – the “Decision Marker Panel”, published Thursday – reported inflation expectations in November at 4.4% over the next 12 months and 3.2% over 3 years, “still high” forecasts, notes Mr. Halpenny.

As a result, “the market now expects a 25 basis point reduction (in the interest rate) by the BoE in August next year”, i.e. later than the European Central Bank (ECB) and the US Federal Reserve (Fed), concludes the analyst.

The day before, the fall in inflation in the euro zone in November, to 2.4% over one year, its lowest level since July 2021, had reinforced currency traders’ forecasts of a rate cut by the ECB, and weighed down the currency. unique.

The greenback, which had benefited the day before this announcement as well as the rise in bond rates, fell on Friday.

The first possible explanation for this decline is the anticipation by investors that the Fed “is finished with its increase in interest rates and is preparing to reduce them in 2024”, in response to falling inflation or an economy American slowdown, estimates Russ Mould, analyst at AJ Bell.

The day before, the PCE price index, the Fed’s preferred gauge, reported that US inflation continued to slow in October in the United States, falling to 3.0% year on year.

Although these data did not influence the price of the dollar downward during the previous session, they are close to “the type of figures against which, historically, the Fed has moved towards rate cuts in the past” , note Deutsche Bank analysts.

During this end-of-year period, the greenback is also subject to a “seasonal bias”: it traditionally weakens against the euro, specifies Mr. Halpenny.

Finally, currency traders were also waiting on Friday for remarks from Fed President Jerome Powell.

This article is originally published on zonebourse.com

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.