Pound Sterling Hits New Peaks Against Euro, Dollar On Receding Rate Cut Bets

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The British Pound reached new multi-week peaks against the Dollar and Euro after the Bank of England's Governor ratcheted up his campaign against expectations for interest rate cuts, warning that rates would not be cut "in the foreseeable future".

Pound Sterling started the week on a firm footing and could extend gains over the coming weeks if the market continues to buy Bailey's message and reduce bets for the scale of cuts in the coming 12 months.

A long Bank of England rate hold "could make the Pound proud in 2024," says Reuters market analyst Robert Howard.

In an interview delivered in England's North East, Bailey said interest rates would not be cut "in the foreseeable future" because getting inflation down from 4% to 2% would be a lot harder than getting it from 6% to 4%.

Howard explains that how long the Bank of England keeps interest rates unchanged is a key question for Sterling in 2024, "with the longer the hold the better for the pound".

"We do have to get [inflation] down to 2% and that's why I have pushed back of late against assumptions that we're talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future because it's too soon to have that discussion," said Bailey.

At the start of last week, the market was priced for as many as 80 basis points of rate cuts for 2024, with the first cut falling as soon as May.

But by the end of the week, these bets had been reduced following surprisingly strong PMI data and Bailey's message to the House of Parliament that it was too soon to expect interest rate cuts.

Above: Bets for rate cuts in 2024 have reduced of late. Image courtesy of Lloyds Bank.

Markets currently see a two-in-three chance of the BoE keeping rates at 5.25% through June 2024, after a hawkish shift in expectations following November's 50+ UK services PMI surprise.

"Hawks opposed to a BoE rate cut any time soon were heartened by Governor Andrew Bailey's admission in an interview published on Monday that getting UK CPI down to its 2% target will be hard work," says Howard. "This suggests Bailey will not be rushing to vote to reduce rates."

The recent shift in expectations regarding the prospect of rate cuts boosted UK bond yields relative to elsewhere and helped lift the Pound to Dollar exchange rate to a 12-week high at 1.2626.

The Pound to Euro exchange rate reached a three-week peak at 1.1530.

Hann-Ju Ho, Senior Economist at Lloyds Bank, says UK government bond yields rose sharply last week, contrasting with more moderate changes in their US and European counterparts.

"Markets pushed back the expected date for a first Bank of England interest rate cut to later in 2024 in the wake of stronger-than-expected PMI business and GfK consumer survey data and the Autumn Statement," he says.

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The Pound has benefited from an apparent improvement in data with the UK's economic surprise index turning higher, providing the kind of positive surprises that can boost a currency.

"The run of better-than-expected data, encouraging the economic surprise index (ESI) to test two-month highs, continued in the wake of the November CBI distributive trades survey coming in at -9. Although the retail sales balance remains in negative territory, for a seventh straight month, a second strong gain in three readings comes in the wake of flash services PMI moving back into positive territory," says Jeremy Stretch, an analyst at CIBC Capital Markets.

"The data recovery points towards the prospect of an unwind in excess GBP real money shorts," he adds.

The UK's composite output index advanced from 48.7 in October to a four-month high of 50.1 in November, a whisker above the growth/contraction line of 50.

"Whereas the Eurozone economy is probably contracting slightly in Q4, the UK economy may already be stabilising," says Holger Schmieding, an economist at Berenberg Bank.