Sterling Holds Steady Despite UK Economic Stagnation
Sterling remained relatively unchanged against the dollar on Friday, hovering around a one-week low after the release of data that showed the UK economy’s failure to grow in the third quarter. Despite this stagnation, the figure was marginally above expectations.
The pound saw a slight increase of $1.2231 following the release of the GDP data, showing no significant change compared to pre-data levels. The numbers revealed a 0% change in gross domestic product for the July-September period, contrary to the forecasted 0.1% decline in a Reuters poll of economists. Many analysts argue that this outcome likely marks the beginning of a recession.
In light of these figures, analysts at MUFG noted, “The scale of outperformance is unlikely to prompt much change in market pricing (for the interest rate outlook).” They added that the market is expected to consolidate next week ahead of the release of key Consumer Price Index (CPI) data.
The potential timing and speed at which different central banks may cut interest rates in the coming year is a significant consideration for currency markets. Currently, markets anticipate approximately 40 basis points of rate cuts by the Bank of England (BoE) by September, which is less than what is projected for the U.S. Federal Reserve or the European Central Bank.
Chief economist of the BoE, Huw Pill, drew attention earlier this week when he stated that the current pricing, which suggests a first rate cut in August 2024, “doesn’t seem totally unreasonable, at least to me.” These remarks, as most central bank policymakers have been avoiding discussions of rate cuts, contributed to the pound’s 1.2% decline against the dollar this week.
Pill emphasized on Thursday that it was crucial to maintain interest rates at their current level to control inflation.
The rise of the greenback has also played a significant role in the fluctuations of the sterling/dollar pair, commonly referred to as “cable.” The dollar strengthened on Thursday after U.S. Federal Reserve officials, including Fed Chair Jerome Powell, expressed uncertainty about whether interest rates are currently high enough.
Meanwhile, the British currency also experienced a drop against the euro, which saw a 0.7% increase against the pound this week, marking its largest weekly gain since mid-September.
As of Friday, the euro stood at 87.32 pence, displaying minimal change against the pound.
The fate of sterling remains uncertain as investors closely monitor economic indicators and central bank decisions in the coming months.