Sterling Declines as U.S. Rate Expectations Shift
On Monday, the British pound dropped to its lowest level in nearly three weeks, reflecting a significant shift in U.S. rate expectations. Traders who previously anticipated a sharp rate cut from the Federal Reserve are now unwinding those bets. As a result, Sterling eased by 0.42%, reaching $1.30745, its weakest point since August 21. This change in sentiment has affected not only the pound but other major currencies as well, as the dollar regained strength after last week’s decline.
U.S. Employment Data and Market Reaction
The shift in expectations came after Friday’s release of U.S. employment data, which showed a smaller-than-expected increase in job growth for August. While this data indicated a steady slowdown in the labor market, it wasn’t enough to warrant a drastic move from the Federal Reserve. Initially, traders believed there was more than a 50% chance of a 50-basis-point rate cut from the Fed. However, by Monday, this had dropped to 25%, as the market reassessed the likelihood of a large cut.
Upcoming U.K. Economic Data and Its Potential Impact on Sterling
In the week ahead, the market’s focus has shifted to key economic indicators from the U.K. Investors are eagerly awaiting labor market data and July’s GDP figures, which could provide more clarity on the future direction of the Bank of England’s (BoE) monetary policy. Last month, the British labor market showed signs of cooling, with a significant drop in job placements and slower wage growth. Despite this, official data expected on Tuesday is forecasted to show strong employment figures, although wage growth may continue to moderate.
Any upside surprises in this data could offer support to the pound. As Societe Generale’s FX strategist Kit Juckes noted, a higher-than-expected wage growth could see Sterling trading below 84 pence per euro. However, with expectations that wage growth will slow to around 5%, the impact may be limited.
Diverging Policies Between the U.S. and U.K.
In recent weeks, there has been a growing divergence between the monetary policies of the U.S. Federal Reserve and the Bank of England. This divergence has played a significant role in the movements of Sterling, which last month hit two-year highs. While the Fed is now seen as less likely to make aggressive rate cuts, the BoE is largely expected to hold rates next week. However, traders are still pricing in a 25-basis-point rate cut from the BoE by November, further contributing to the pound’s recent decline.
The euro also gained against the pound for the seventh consecutive day, with Sterling eases to three-week low, trading at 84.84 pence per euro. As the outlook for U.S. and U.K. monetary policy continues to diverge, this could lead to further fluctuations in the value of the pound.
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