Pound climbs on hopes of US rate cuts – but further progress looks unlikely
Sterling has recorded a strong start to November as traders grow increasingly confident that the US Federal Reserve has reached the peak of its rate-hiking cycle.
The pound was trading 0.11 per cent higher against the dollar, reaching $1.2390 around market close. Earlier in the day it reached just shy of $1.2400 – the highest level since mid-September.
The lift for sterling, which has increased from around $1.2150 at the beginning of November, comes as investors hope that the Fed will start cutting rates sooner than expected.
“The outlook for GBP/USD has improved considerably since the start of November on a combination of USD weakness and not as bad as feared UK economic data,” Fiona Cincotta, senior financial market analyst at City Index.
Recent data has shown weakness emerging in the US labour market, suggesting that the Fed’s rate hikes are starting to bear fruit. A survey from the manufacturing sector also pointed to a downturn.
The Bank of England meanwhile has stressed it will not be cutting interest rates any time soon as inflation remains stubbornly above target.
Higher interest rates tend to attract foreign investment and boost the value of the domestic currency.
Traders will be watching future updates on the state of the UK economy closely for signals that it is stuttering under the pressure of higher borrowing costs.
“For the pair to sustain last week’s gains and rise meaningfully above the $1.24 handle, we would need more data showing that the downturn in the UK economy has bottomed out and more evidence that the US economy is cooling,” Cincotta continued.
City economists expect UK GDP to contract in the third quarter with a winter recession looking a real possibility. A slowdown would encourage the Bank of England to start cutting rates sooner than it has guided, constraining further improvements in the sterling exchange rate.