Pound Sterling Recovery Stalls, BoE Rate Cut Seen Inevitable

January 17, 2025 - Written by Tim Boyer

STORY LINK Pound Sterling Recovery Stalls, BoE Rate Cut Seen Inevitable

Relatively benign US and UK inflation data on Wednesday, coupled with another weak UK GDP release, have provided significant relief for the UK bond market.

The UK 10-year yield has settled around 4.74% compared with 16-year highs above 4.90% recorded earlier this week.

Although fears surrounding the bond market have eased, the Pound has remained on the defensive, especially with very strong expectations of a Bank of England (BoE) rate cut next month.

The Pound to Dollar (GBP/USD) exchange rate settled just below 1.2200, and failure to regain this level would risk 14-month lows of nearly 1.2100.

The Pound to Euro (GBP/EUR) exchange rate was around 1.1855 from 1.1880 highs on Wednesday.

Danske Bank is relatively upbeat on the Pound; “We remain cautiously optimistic that the move in UK space and GBP FX is overdone and stay strategically bearish on EUR/GBP.” (GBP/EUR gains)

MUFG noted that the Pound has struggled to make any headway; “The developments have triggered a relief rebound for Gilts, but there has been limited positive spill-overs for the pound. More active BoE easing would dampen pound performance going forward.”

The ONS reported that UK GDP increased 0.1% for November after a 0.1% decline the previous month but below consensus forecasts of a 0.2% increase.

Industrial production declined 0.4% for the month, but construction output increased 0.4% for the month, while there was a slight 0.1% increase in services-sector output after a 0.1% decline for October.

On a quarterly basis, there was no growth from the previous three months.

According to ONS director of economic statistics Liz McKeown, “The economy continues to be broadly flat, having grown slightly in November following two small falls in the previous months.”

Barret Kupelian, chief economist at PwC, commented, “We know that in net terms growth remained flat for the three months to November; therefore, we are clearly far off from a state where the economy has reached ‘escape velocity’ and grows on a sustained basis.

The latest inflation and growth data have reinforced expectations that the Bank of England will cut interest rates in February.

There was also dovish commentary from BoE external member Taylor overnight.

According to Taylor, there are downside risks to growth and inflation, and interest rates need to be lowered towards a neutral rate.

He repeated comments suggesting that a decline in interest rates of 100 basis points this year would be realistic.

PwC’s Kupelian added, “Given the latest inflation reading yesterday, weaker than expected growth could help pave the way for faster rate cuts by the Bank of England. This could be a helpful tailwind to the economy at a time when the international outlook becomes more unpredictable.”

Elsewhere, the RICS housing index strengthened to 28% for December from 24% previously and the strongest reading since October 2022.

RICS chief economist Simon Rubinsohn commented that the signals from the survey around expectations over the next twelve months also remain solidly positive for now. However, the resilience of the uplift in market mood could be tested if the mortgage rates do begin to climb in a material way over the coming months.”

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TAGS: Pound Sterling Forecasts