The British pound found some stability on Monday, trading at $1.2627 after falling to $1.2598 on Friday, its lowest level since mid-May. This followed a six-month low triggered by a surge in the U.S. dollar, which gained momentum after Donald Trump’s November 5 election victory.
Dollar Surge Drives Market Dynamics
The dollar index has risen approximately 3% since Trump’s win, as investors bet that his policies—centered on trade tariffs and tax cuts—will fuel U.S. economic growth and inflation. These expectations have dampened the likelihood of further Federal Reserve interest rate cuts, which, combined with a sharp rise in U.S. Treasury yields, have made U.S. bonds more attractive and supported the dollar's strength.
Sterling’s Performance and Economic Backdrop
Since the U.S. election, sterling has declined around 2.7%. Despite this drop, it has fared better than the euro, as traders believe the eurozone may face harsher consequences from potential U.S. tariffs aimed at China, the European Union, and Mexico.
“Recent sterling weakness has principally been a story of U.S. dollar strength,” explained Matthew Amis, investment director at asset manager abrdn. He added that the UK’s growth outlook would need to improve significantly for sterling to regain momentum, even as the Bank of England signals gradual rate cuts.
Friday’s economic data painted a bleak picture for the UK economy, revealing an unexpected contraction in September and a slowdown to just 0.1% growth in the third quarter. This weak data contributed to six consecutive days of losses for the pound.
Outlook for the Bank of England
Market participants now estimate an 80% probability that the Bank of England will cut interest rates next month. Expectations suggest a total reduction of around 65 basis points, bringing the BoE rate to just above 4% by the end of 2024. Currently, the rate stands at 4.75%.
Interestingly, the pound has shown some resilience due to the relatively modest pace of expected rate cuts. Sterling has dropped 0.8% against the dollar so far in 2024, compared to a 4.3% decline for the euro.
Euro’s Struggles and Recovery
The euro hit a two-and-a-half-year low against the pound last week, trading at 82.62 pence. Investors are concerned that Trump’s trade policies will have a more significant negative impact on the eurozone than on the UK. However, the euro has rebounded, climbing to 83.70 pence after Friday’s release of weak UK economic data.
Market Sentiment and Looking Ahead
While sterling has stabilized for now, its future trajectory remains tied to both domestic economic performance and global market dynamics. The strength of the U.S. dollar, driven by rising Treasury yields and expectations of growth-friendly policies under Trump, will likely continue to influence currency markets.
For sterling to regain strength, the UK’s economic outlook must improve. Until then, traders and investors will closely monitor developments in U.S. trade policy, UK economic data, and BoE rate decisions for signals of future movement.
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