The pound experienced a mixed day of trading on Thursday, as it edged up against the dollar and the euro but sank against the yen. Investors are growing increasingly optimistic that the Bank of Japan (BoJ) could indicate an end to its ultra-easy monetary policy next week, leading to the pound losing 1.3% in value against the yen, its largest drop against the Japanese currency in nearly five months.
Although the pound has remained strong this month following its biggest monthly rally in a year in November, investors believe that major central banks will cut rates early next year, with the exception of the Bank of England. Futures markets indicate that investors do not expect the BoE to make any rate cuts until June, while both the European Central Bank and the Federal Reserve are predicted to make cuts in March. This delay in potential rate cuts has helped limit any profit-taking from November’s rally.
The catalyst for the yen’s rally on Thursday was a comment from Bank of Japan Governor Kazuo Ueda, who stated that the central bank has various options for interest rates once it withdraws borrowing costs from negative territory. Analysts believe that this comment suggests that the BoJ remains committed to normalising policy, most likely at the start of the fiscal year in April. However, with the expected timing and scale of rate cuts from other major central banks being brought forward, this move would be considered risky and could lead to a significant increase in the value of the yen against major trading partner currencies.
In terms of currency trading on Thursday, the pound was up 0.2% against the dollar at $1.2587 and up 0.1% against the euro at 85.65 pence. However, it was down 1.45% against the yen at 182.31 yen, its lowest level since late October.
Looking ahead, the Bank of England is also set to meet next week, with market expectations suggesting that it will leave UK rates unchanged. However, investors will closely scrutinise the post-meeting statement for indications of how Monetary Policy Committee members voted and the central bank’s outlook on inflation and growth.
Futures markets suggest that UK rates could fall by around 80 basis points next year, bringing rates below 4.40%. In contrast, traders predict that the European Central Bank will implement around 140 basis points in cuts, while the Federal Reserve could cut US rates by around 120 basis points.
The falling yields on 10-year UK gilts, which are currently trading below 4% at their lowest point in seven months, have provided some support for the pound. Over the past six weeks, yields on German 10-year bonds, the benchmark for the eurozone, have dropped by 80 basis points, and 10-year US Treasury yields have fallen by 90 basis points.
Analysts suggest that the drop in the euro/sterling exchange rate may have been overdone, and they anticipate a gradual dovish repricing in Bank of England rate expectations, which could favour a rebound above 86.00. However, this may not occur in the short term.
Overall, the pound experienced a mixed day of trading against major currencies on Thursday, with its performance largely influenced by expectations regarding the actions of other central banks. Investors will closely watch the Bank of Japan and the Bank of England next week for any signals that could impact future currency movements.
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