The pound rose against the dollar on Monday, fueled by optimism among investors who view sterling as a promising investment for the coming year. The dollar struggled against most currencies except the yen. This surge in the pound can be attributed to the growing belief that the U.S. Federal Reserve will soon cut interest rates, creating a gap between British and U.S. bond yields and making UK fixed income assets more attractive.
According to Jane Foley, head of FX strategy at Rabobank, the prevailing view that rate cuts by the Bank of England will be slower than those of the Fed in 2024 has bolstered the pound. Investors are currently pricing in approximately 120 basis points of cuts from the BoE for next year, while around 150 bps are expected from the Fed. Foley and other strategists foresee continued profitability for sterling due to this gap in expectations, with the potential for the pound to reach $1.30 against the dollar within the next nine to twelve months.
Goldman Sachs is even more optimistic, predicting that sterling could reach $1.35 within a year. This projection signifies a significant turnaround from just over a year ago, when a chaotic government budget caused the pound to hit its lowest level on record at $1.0327.
Inflation data for November is expected to be released on Wednesday, adding further insight into the economic landscape. Compared to the U.S. and the euro zone, inflation in the UK remains high, with November figures standing at 4.4% year-on-year. This disparity in inflation rates has played a role in the Bank of England’s resistance to expectations for rate cuts.
The dollar index, which monitors the currency against six peers, was relatively stagnant at 102.51. However, the yen experienced a decline of over 1% after the Bank of Japan maintained its ultra-loose monetary policy.
As the year draws to a close, traders will be keeping a close eye on British inflation data and will be eager to see if wage growth, a key driver of inflationary pressure, shows any signs of decline. Bank of England Deputy Governor Ben Broadbent emphasized the need for further observation in this area.
Overall, the sterling’s recent climb and the positive sentiment surrounding it suggest that investors are anticipating further gains in 2024. With rate differentials and inflation dynamics at play, the pound could see continued growth in the coming months.
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