Sterling drops ahead of policy decisions by BoE, Fed

by Jonathan Adams
pound sterling

The pound was 0.2% lower against the dollar to $1.2671, and was on track to lose nearly 0.3% this month

Britain’s pound dropped against a stronger dollar on Wednesday ahead of policy announcements by both the Bank of England and Fed over the next two days.

The pound was 0.2% lower against the dollar to $1.2671, and was on track to lose nearly 0.3% this month.

Markets are just positioning themselves before the Fed tonight and BoE policy meeting tomorrow, said Kirstine Kundby-Nielsen, FX analyst at Danske Bank.

Sterling is still one of the better performers in the G10 against the greenback this year as Britain’s economic performance has been robust and inflation has shown signs of being stickier than in other regions.

Britain’s economy began 2024 on a stronger footing, the preliminary S&P Global/CIPS UK Composite PMI showed earlier this month, reaching its highest level in seven months.

UK interest rates are likely to be kept unchanged when the BoE announces policy on Thursday, with markets fully pricing the first interest rate cut by the June meeting.

Investors have pared bets on the number of rate cuts expected from the Bank of England this year, with markets pricing nearly 100 bps of cuts in 2024 or around four quarter-point cuts. Prior to December’s inflation figures, released in mid-January, markets had expected almost five 25 bps cuts.

In contrast, markets are pricing almost 130 bps of cuts from the Fed and almost 140 bps of easing from the ECB in 2024.

We do not expect inflation to deviate by the extent priced by markets and expect the BoE to follow the cutting cycle of the ECB, where we see the same inflation dynamics, said Danske Bank’s Kundby-Nielsen.

Kundby-Nielsen added: That’s one reason why we are negative on sterling from here.

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