LONDON: Sterling was on the front foot against the dollar on Thursday ahead of a Bank of England meeting at which analysts expect rate-setters to push back on expectations of early cuts in 2024, a different stance from the Federal Reserve a day earlier.
The pound rose 0.3% to $1.2653, a 10-day high after rising 0.4% overnight.
The BoE announces its latest rate decision at 1200 GMT followed by the European Central Bank at 1315 GMT.
Markets are all but certain neither will move their main policy rates but the focus is on how firmly rate-setters push back against market pricing of substantial interest rate cuts next year.
Fed chair Jerome Powell on Wednesday did little to challenge expectations of US rate cuts for 2024 saying the Fed’s tightening of monetary policy is likely over and a discussion of cuts in borrowing costs is coming “into view.”
That caused traders to increase rate cut bets and markets are now pricing around 150 basis points of easing from the Fed in 2024, a major increase from before the decision.
That sparked a knock on effect in Europe. Markets are expecting nearly 125 basis points of cuts for the BoE by end 2024, up from 100 the day before, and about 160 bps of cuts from the ECB.
Sterling falls after data shows UK economy shrank in October
“Of the three major central banks we thought that the BoE would have the most credibility in pushing back against dovish market pricing that could help the pound to outperform both the euro and US dollar in the near-term,” said Lee Hardman, senior currency strategist at MUFG in a note to clients.
He says that recent British data - slowing wage growth and an unexpected GDP contraction in October - had undermined that view somewhat however.
“As a result the near-term window for relative pound outperformance against the euro and US dollar could prove short-lived.”
“While the developments are unlikely to stop the BoE from pushing back again today against earlier rate cut expectations, if the softening growth inflation data continues into early next year it will encourage the BoE more quickly into a dovish policy pivot,” Hardman added.
The euro was last a fraction higher against the pound at 86.22 pence, having gained 0.5% so far this week, on the back of the wage growth and GDP data.
Gilts rally
British government bonds, or gilts, joined in the global bond rally on the back of rate cut expectations.
The rate-sensitive two-year yield dropped 18 basis points to 4.18%, its lowest since May.
The two year German yield was down 16 bps and the two year US Treasury yield dropped 16 bps, after Wednesday’s stonking 25 bps fall, its biggest daily move since the banking crisis in March.
The British 10 year gilt yield was 15 bps lower at 3.69% compared to a 13 bp drop for the German bund yield.
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