China Stimulus Measures Unleash Fresh Pound Buying

September 26, 2024 - Written by John Cameron

STORY LINK China Stimulus Measures Unleash Fresh Pound Buying

Sterling has continued to make headway in currency markets with the Pound to Dollar (GBP/USD) exchange rate hitting 31-month highs around 1.3380.

The latest round of Pound strength has been due primarily to global influences, although there has been an element of domestic support.

According to ING; “We do not see GBP/USD positioning as particularly stretched and given perhaps a softer dollar environment, the direction of travel continues to be towards 1.35.”

Overnight, China announced a series of economic support measures. China’s central bank announced an easing of monetary policy with a cut in reserve ratio requirements and the repo rate.

There was also guidance over further easing later this year and measures to support the housing market.

Asian equities posted strong gains which helped underpin risk appetite in Europe.

The Pound tends to perform strongly when risk appetite strengthens.

MUFG commented; “The package of rate cuts, and more specific support for the weak housing market and stock market has helped to boost investor confidence by highlighting that domestic policymakers are stepping up efforts to support economic growth and avoid deflation.”

ING commented; “For the dollar itself, a reflationary environment is mildly negative as investors rotate into more pro-cyclical and EM currencies.”

There was still an element of caution and MUFG added; “It still remains to be seen how effective the new measures will prove to be at stimulating growth.”

Danske Bank expects an eventual reversal and a dollar recovery; “Despite softer US data, the potential for persistent US inflation and/or US growth outperformance remains positive for the USD, as markets are essentially pricing in a perfect soft landing.”

In her conference speech on Monday, UK Chancellor Reeves suggested that fiscal rules could be adjusted in the October budget.

ING commented; “Speculation is growing that there could be a change in the accounting treatment for some of Labour's new institutions – such as the National Wealth and GB Energy – which could potentially unlock an extra £15bn of borrowing.”

The impact may be limited, but according to ING; “Sterling has enough support at the moment without these potential investment plans.”

The Bank of England is still set to cut interest rates gradually cuts with markets pricing in over an 80% chance of a November cut.

Governor Bailey comment on Tuesday; “We still have to get it sustainably at the target and we have quite an unbalanced mix of components of inflation at the moment. But I’m very encouraged that the path is downwards therefore I do think the path for interest rates will be downwards, gradually.”

With expectations of further Federal Reserve rate cuts and dismal Euro-Zone data, the Pound can maintain a firm tone even with gradual rate cuts.

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TAGS: Pound Dollar Forecasts