Bank of England: Pound Sterling Higher as BoE On Track for Gradual Rate Cuts

November 13, 2024 - Written by Tim Boyer

STORY LINK Bank of England: Pound Sterling Higher as BoE On Track for Gradual Rate Cuts

After hitting 31-month highs just above 1.2100 on Monday, the Pound to Euro (GBP/EUR) exchange rate has corrected to 1.2070, but found buyers near 1.2050.

Overall yield spreads will continue to underpin GBP/EUR, especially if the Bank of England maintains a cautious stance on lowering interest rates. The Euro also remains vulnerable due to fears over a more aggressive US trade stance, especially with on-going unease over the German outlook.

ING commented; “The market is already pricing in only a modest BoE easing cycle from here – just three rate cuts next year. And unless there is a major surprise from Pill today, that pricing can stay intact. If so, EUR/GBP will struggle to sustain a move over 0.8300/8315 now and should continue to head lower.” (Further GBP/EUR buying near 1.2050).

BoE Chief Economist Pill maintained a cautious tone with comments that pay growth is hard to reconcile with the CPI inflation target.

He added that there is still some work to be done on underlying domestic inflation pressure in the UK.

The latest UK labour market data reported an increase in unemployment to a 4-month high of 4.3% in the 3 months to September from 4.1% previously and above consensus forecasts of no change.

Provisionally, the number of employees on payrolls declined 5,000 October after a 9,000 decline for September while vacancies declined for the 28th successive month.

Headline average earnings increased 4.3% in the year from a revised 3.9% previously and compared with expectations of no change while underlying earnings slowed marginally to a 2-year low of 4.8% from 4.9%, but slightly above expectations of 4.7%.

Liz McKeown, the ONS’s director of economic statistics, noted; “Growth in pay excluding bonuses eased again this month to its lowest rate in over two years. Pay growth including bonuses increased, but for recent periods these figures have been affected by last year’s one-off payments made to public sector workers.”

According to Rob Wood, chief UK economist at Pantheon Macroeconomics; “Unemployment is likely gradually rising, the labour market is loosening but it remains tight. Similarly, wage growth is gradually slowing but remains too high still to deliver inflation sustainably at target.”

Paul Dales at Capital Economics commented; “We continue to think the Bank will skip the December meeting and cut rates at the following February meeting.”

The German ZEW economic confidence index retreated to 7.4 for November from 13.1 previously and below consensus forecasts of 13.2. There was also renewed deterioration in the current conditions index.

The German political situation and outlook for fiscal policy will also continue to be monitored closely.

Rabobank commented; “How Germany’s political crisis plays out could thus have implications not just for domestic fiscal policy but also for ECB monetary policy and therefore the EUR.”

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TAGS: Pound Sterling Forecasts