Pound Set for Longest String of Losses vs Euro This Year
The British pound is on track for its most prolonged sequence of declines against the euro seen this year. This downtrend comes in the wake of remarks made by the Bank of England’s governor, suggesting that inflation does not need to return to the target to justify rate cuts. Meanwhile, recent data from the European Central Bank indicates that wage growth within the euro zone has slowed from the previous record highs seen in the third quarter.
As of the latest figures, the Sterling showed a marginal increase of 0.13% against the dollar, standing at $1.2612. However, it faced a downward trajectory against the euro, down by 0.23% at 85.705, which is close to its lowest point in a month. This decline marks the pound’s fifth consecutive daily loss against the euro, representing the longest such streak since November of the previous year.
The focus of the European Central Bank (ECB), mirroring that of the Bank of England (BoE), remains on wage growth and price pressures within the services sector. These components of the inflation landscape tend to react more slowly to interest rate adjustments compared to other assets, such as housing or raw materials. BoE Governor Andrew Bailey, in a session with UK lawmakers, hinted that expectations for interest rate cuts within the year were not misplaced. He acknowledged the anticipation of rate reductions, yet he underscored the emerging signs of an economic upturn in Britain, especially highlighting strengths in the labor market and household incomes.
Despite the prediction of a recession at the year’s end, the futures market anticipates approximately three rate cuts from the BoE within the year, contrasting with the ECB’s expected four or more. This speculation has diminished from earlier predictions, which leaned closer to five cuts as we entered 2024, an adjustment that one might assume would lend the pound some semblance of support.
David Stritch, a strategist at Caxton, shared insights on the shifting expectations for major central banks’ rate cuts in 2024, noting they’re tapering swiftly. This trend leaves the Sterling without much advantage from rate differentials. Stritch elaborated, “It suggests rates at 4.5% by year-end, only 0.75% off where we are now, considering the optimistic pricing of 1.5% of cuts at the start of the year.” He highlighted how swiftly the earlier positive projections have waned. Despite these conditions, Sterling has found little to no success in capitalizing on these developments, attributed in part to the global nature of adjusting year-end rate expectations, which diminishes its edge against other currencies.
The ongoing dynamics place the pound in a precarious position as it navigates through economic uncertainties and evolving central bank policies. The outcome of these developments could have significant implications for currency markets and investor strategies in the coming months.
