GBP/USD continues its winning streak that started last Thursday, and which has continued Tuesday this week. The pound Sterling (GBP) remained stronger against the US dollar (USD) for the fourth day in a row reflecting the resilience of the UK economy. The British currency’s strength comes despite the implementation of a tight monetary policy by the Bank of England (BoE). On the other hand, the US dollar remains weak as markets expect the Federal Reserve (Fed) to end its rate hikes and to move in the opposite direction.
Rates will not be cut in the foreseeable future
On Monday, speaking in an interview in England’s North East, the BoE Governor Andrew Bailey emphasised that rates will not be cut in the foreseeable future and pushed back against expectations for interest rate cuts. He explained that getting inflation to fall from 4% to 2% would be a lot more difficult than getting it to go down from 6% to 4%. His comments suggest that he won’t be voting to reduce rates any time soon.
The pound is anticipated to extend its gains in the coming weeks as the market accepts Bailey’s outlook and reduces its expectations for the number of cuts in the coming 12 months. As a Reuters market analyst pointed out, a long BoE rate hold “could make the Pound proud in 2024.” This means that the longer the central bank keeps interest rates unchanged the better it will be for the pound.
Bailey was quoted saying: “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.”
Bets for rate cuts in 2024 decrease
While at the beginning of last week, the market had priced in around 80 basis points of rate cuts for 2024, with the first cut to take place in May, by the end of the week, these expectations had already dropped after the release of robust PMI data and Bailey’s statement to the House of Parliament that it was too early to be thinking about interest rate cuts. Additionally, apart from the stronger-than-expected PMI business data, GfK consumer survey data and the Autumn Statement also helped support the pound and push back the anticipated date for the first BoE interest rate cut later in 2024. There is now a two-in-three chance of the BoE keeping rates at 5.25% up until June 2024. The recent change in expectations about the possibility of rate cuts gave a lift to UK bond yields and pushed the pound to dollar exchange rate to a 12-week high.
Better-than-expected data boosts the pound
While the Eurozone economy is expected to contract slightly in Q4, the UK economy appears to be stabilising, economists have noted. The improved UK data provided a boost to the British currency. The November CBI distributive trades survey came in at -9, and while retail sales balance remains for the 7th consecutive month in negative territory, flash services PMI recovered and was up into positive territory. The composite output index moved higher to a four-month high of 50.1 in November, up from 48.7 in October and above the growth line of 50.
On Tuesday, BoE Deputy Governor Dave Ramsden also delivered a hawkish message by highlighting the resilience of the UK economy and saying that UK inflation was mainly homegrown and monetary policy will have to remain restrictive for an extended period of time.