Thursday Jan 25 2024 08:58
5 min
Pound sterling saw a sharp rally on Wednesday, and gilts — UK government bonds— reversed gains following robust UK private sector activity data that prompted traders to adjust their expectations of potential monetary easing by the Bank of England in the coming year.
The currency surged by as much as 0.7% against the U.S. dollar, with the GBP/USD exchange rate (widely known as “cable” in currency markets) moderating to a 0.53% increase at $1.2754. This puts it on track for the most substantial daily gain in over a month.
Gilts erased earlier advances, leading the 10-year yield to hit 4% for the first time since mid-December. Market sentiment also shifted to incorporate fewer and later interest-rate cuts, as per a report by Bloomberg’s Aline Oyamada and Alice Atkins.
These moves unfolded in response to the release of S&P Global’s Composite Purchasing Managers’ Index (PMI), which unexpectedly rose in January to its highest level in seven months. The data also revealed that Britain’s private sector firms reported the most significant jump in costs in five months.
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Traders have been scaling back expectations for rate cuts since the beginning of the year, with a more rapid repricing occurring last week when the UK December inflation reading exceeded economists' expectations. Swaps linked to the Bank of England's meetings now imply a 95-basis point cut this year, down from about 130 basis points last week and 150 basis points in December.
The timing of the first interest rate cut has also been pushed back. The market is now pricing in zero chances of a cut in March, a shift from mid-December, while a quarter-point move is fully priced in only by August, compared to June, which was the previous expectation this Tuesday.
The Bank of England last maintained UK interest rates at 5.25% last December.
Sterling has outperformed other G-10 currencies against the U.S. dollar in the early part of the year, trading at robust levels against various crosses. The pound fluctuates around its highest level against the Japanese yen since 2015 and its strongest level against the euro in over four months.
The GBP to JPY rate was close to 187, while the EUR to GBP pair traded sideways at 85.59p at the time of writing on Wednesday
In a EUR/GBP forecast issued on Monday, Chris Turner, Global Head of Markets at ING, wrote that sterling may hold its gains against the euro in the coming weeks:
“Given that it's PMI week, sterling may continue to hold gains against the euro.This is because the UK's composite PMI is smartly above 50 (last reading 52.2) compared to the Eurozone's (48.0).
The EUR/GBP pair has lots of support in the 0.8500/0.8550 area and our base case assumes this is the bottom of the trading range this quarter”.
The attention of rate watchers now turns to the European Central Bank’s meeting on Thursday. ECB officials have been resisting market expectations of early rate cuts as the bank remains committed to combating inflation.
In his week-ahead overview last Friday, Markets.com Chief Market Analyst Neil Wilson listed some of the opinions voiced by key ECB officials ahead of the meeting:
“Last week several monetary policy ECB hawks delivered a clear message in concert. Nagel said ‘It's too early to talk about cuts, inflation is too high,’ whilst Holzmann told CNBC: ‘I cannot imagine that we’ll talk about cuts yet, because we should not talk about it. Everything we have seen in recent weeks points in the opposite direction, so I may even foresee no cut at all this year.’
However, president Lagarde followed this up by saying the ECB is likely to cut by the summer – though that’s still later than the spring penciled in by markets.”
At the time of writing on January 24, the GBP to USD exchange rate held at $1.2758, while the EUR to GBP rate was mostly flat at 0.8559. The pound to dollar rate has risen by close to 2.9% over the past year.
The U.S. dollar index (DXY) – a measure of the greenback’s strength against six major currencies – traded 0.63% lower at 102.97.
When considering foreign currency (forex) and indices for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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