Pound Sterling Holds Firm Against Euro and Dollar Despite BoE Rate Cut

August 4, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling Holds Firm Against Euro and Dollar Despite BoE Rate Cut

The Pound Sterling (GBP) dipped against Euro (EUR) and US Dollar (USD) in immediate reaction to the Bank of England (BoE) rate cut but was resilient amid relatively hawkish rhetoric and global dimension.

Sterling and the Dollar were both struggling for sustained support.

The Pound to Dollar (GBP/USD) exchange rate dipped to 4-week lows near 1.2750 before a recovery to 1.2800.

The Monetary Policy Committee cut interest rates by 25 basis points to 5.00%, the first cut since March 2020.

A substantial majority of investment banks had forecast a cut, but the decision was expected to be on a knife edge and markets had priced in around a 60% chance of a move.

In the event, the decision was very close with a 5-4 vote for the cut.

Governor Bailey, Breedon, Dhingra, Lombardelli and Ramsden voted in favour and considered that there had been sufficient progress in reducing inflation.

Greene, Haskel, Mann and chief economist Pill voted to hold rates at 5.25% due to concerns that domestic inflation was more entrenched.

Governor Bailey warned that the bank would have to be cautious over future moves while some members voting for a cut also considered that the decision was finely balanced.

Seema Shah, chief global strategist at Principal Asset Management, commented; "The Bank has delivered a hawkish cut, giving little signal of back-to-back rate reductions."

Investment banks and markets still expect further rate cuts.

According to Commerzbank; “We continue to assume that the BoE will cut interest rates by 25 basis points every three months, next in November and then in February and May 2025.”

The global dimension was also a key element for markets with a particular focus on the US.

On Wednesday, the Federal Reserve held interest rates at 5.50% but Chair Powell indicated that the central bank would be willing to cut rates at the September meeting provided there was no further negative news on inflation.

Powell also stated that the balance of pressures from inflation and employment were now much more balanced and jobs data will, therefore, continue to be monitored closely.

Initial jobless claims increased to an 11-month high of 249,000 from 235,000 previously and above consensus forecasts of 236,000.

In this context, the latest employment report on Friday will be watched very closely with further concerns over the labour market if the data is weaker than expected.

Consensus forecasts are for an increase in non-farm payrolls of around 175,000 with the unemployment rate holding at 4.1%.

ING commented; “This softening in US short-dated rates should be negative for the dollar and positive for risk assets. The problem for risk assets is that geopolitical threats plus a very soft manufacturing story in Europe and Asia are hardly supporting growth-friendly currencies.

It added; “Perhaps that is why the biggest beneficiaries of this softer dollar environment continue to be the Japanese yen and the Swiss franc.”

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TAGS: Pound Dollar Forecasts