Sterling Holds Firm, Euro Weakens, Dollar Gains as US Election and Central Banks Take Focus
GBP
Sterling has been one of the best-performing major currencies in 2024, thanks to the Bank of England’s cautious stance on cutting interest rates and better-than-expected economic data earlier in the year. If the upcoming budget is well received, and the BoE continues to take a measured approach to rate reductions, the Pound could maintain its strong position, especially against the Euro and other European currencies. At the time of writing, Sterling is currently sitting at 1.2032 against the Euro, the highest level seen since April 22.
Chancellor Reeves faces the challenge of addressing a £22 billion budget shortfall, which will largely be tackled through tax increases. With income tax and VAT off the table, the focus is expected to shift towards businesses and entrepreneurs. If these measures dampen economic growth, inflation could ease more quickly, potentially prompting the Bank of England to accelerate its rate cuts.
Bank of England Governor Andrew Bailey made his first of four scheduled appearances this week. While much of his commentary stayed in line with recent messaging, he did express some concern over the BoE’s handling of recent financial stability risks. With two more speeches to come, traders will be keeping an eye on any repeated themes from Governor Bailey.
Looking ahead, markets will focus on Governor Bailey’s upcoming speech later today and the PMI data due on Thursday. Economists are predicting a slight dip in the UK’s activity, with the Services PMI for October expected to soften to 52.2 from 52.4 in the previous month.
EUR
The Euro is under pressure as markets expect more interest rate cuts from the European Central Bank (ECB). While inflation is improving, concerns about the Eurozone’s weak economic outlook are growing.
The ECB has already cut rates three times this year, and another reduction is expected in December. Comments from ECB President Christine Lagarde suggest the economy is struggling, leading markets to predict further 25-basis point cuts at upcoming meetings until mid-2025.
The Eurozone economy has been near stagnation for almost two years, and a recovery keeps getting delayed. Some economists now believe the region may be facing deeper, long-term economic issues.
All eyes are on ECB President Christine Lagarde this week, with key speeches scheduled for this evening and tomorrow.
USD
The Dollar continues to strengthen, supported by several factors. US 10-year Treasury yields have risen by 15 basis points this week, and the 2-year USD OIS is also climbing, with only 37 basis points of Fed rate cuts expected. Oil prices are on the rise, and the upcoming US election is prompting some cautious repositioning in the markets.
The ‘Trump trade’ is adding to the volatility. Betting markets now give Donald Trump over a 60% chance of winning next month’s presidential election, though polls show Kamala Harris slightly ahead.
Some analysts think Trump’s protectionist policies could push US inflation higher, leading to fewer interest rate cuts by the Federal Reserve. This has increased risk aversion, boosting the Dollar recently. As of writing, GBP/USD is trading at 1.2977.
We specialise in helping businesses and individuals manage foreign exchange risks through expert insights, personalised guidance, and tailored strategies. If you have upcoming currency needs and would like to explore how we can assist, get in touch with one of our consultants on 020 3876 5432.