Sterling Set for Biggest Weekly Gain Against the Dollar This Year
LONDON – Sterling is on track for its largest weekly gain against the dollar since mid-December, following the Bank of England’s decision to hold rates steady and push back against expectations of imminent rate cuts. Additionally, the greenback has been weighed down by lower U.S. yields.
As of Friday, the pound was up 0.08% against the dollar, trading at $1.2753. It is set for a weekly gain of 0.4%, marking its most significant increase in seven weeks. Against the euro, it remained flat at 85.29 pence but is still positioned for a sixth consecutive weekly strengthening against the European currency.
Thursday’s Bank of England meeting took center stage for the pound this week. The meeting largely went as expected, with the BoE maintaining rates at their current level and removing any language suggesting the possibility of further tightening. However, Governor Andrew Bailey dismissed speculations of imminent interest rate cuts, stating that it was too soon to claim victory in terms of inflation targets.
Bailey emphasized that reaching the 2% inflation target would not be considered a complete achievement, as price growth is expected to pick up again. He noted a shift in the Bank of England’s thinking, stating, For me, the key question has moved from ‘How restrictive do we need to be?’ to ‘How long do we need to maintain this position for?’
Following the decision, the pound experienced an upward surge. Analysts from Bank of America noted, This is a clear response to current market pricing, which is now incorporated into the Bank’s forecasts. We had recommended tactical GBP longs into the BoE decision based on precisely what has been delivered today.
Market expectations currently suggest four 25 basis point rate cuts from the Bank of England throughout the year, with a 50% probability of the first cut occurring as early as May.
Bank of America added, Notwithstanding the recent market turbulence caused by US regional banks, we continue to see the backdrop for GBP as conducive both from a rates and volatility perspective.
The ongoing selloff of U.S. regional banks has generated further losses, contributing to the decline in the benchmark 10-year Treasury yield. Within the week, the yield dropped by 10 basis points, totaling a decrease of approximately 27 basis points. The yield currently stands at 3.891%, and this decline has put pressure on the dollar.
The dollar index, which measures the performance of the U.S. dollar against six major currencies, is poised for its first weekly fall in 2024.
Investors are also considering the findings of a survey published by U.S. bank Citi, which revealed increased expectations for inflation among the British public in January. The potential cause of this increase in inflation expectations is concerns surrounding shipping disruptions in the Red Sea.
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