In the United Kingdom, the pound may weaken amid expectations of rate hikes in the US and eurozone
In the United Kingdom, the British pound, which has outperformed a number of G10 currencies this year, may lose some ground due to expectations of a more dovish policy by the Bank of England and the approaching presentation of the state budget. This is reported by CNBC Top News.
Since the start of the year, sterling has risen by around 1.6% against the euro, 2.8% against the Swiss franc, 4.9% against the Swedish krona and 1% against the Canadian dollar. At the same time, its exchange rate has barely changed against the US dollar, while it has fallen by 1.3% against the Japanese yen.
A resilient economy supported sterling
Ebury head of market strategy Matthew Ryan called the pound an unexpected leader among G10 currencies over the past three months. In his assessment, the resilience of the British economy has supported the currency. The country’s gross domestic product grew by 0.4% in the second quarter after increasing by 0.6% in the first quarter.
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CNBC notes that consumer spending was supported by sunny weather and interest in the FIFA World Cup, while business activity remained relatively resilient despite an unstable geopolitical situation. The pound also received support at the start of the conflict related to Iran in April, when markets expected a response from the Bank of England to inflation risks.
Markets await central bank decisions and the budget
Despite stronger price pressures, the Bank of England kept its key rate at 3.75% throughout the year. Market pricing indicates a low probability of an increase at the September meeting. Meanwhile, market participants expect a rate hike by the European Central Bank and increasingly consider such a move by the US Federal Reserve.
Rabobank senior currency strategist Jane Foley believes that dovish rhetoric from the Bank of England on September 17 could further weaken the pound ahead of the first annual budget of Prime Minister Andy Burnham’s administration, scheduled for October 28. JP Morgan economist Allan Monks expects the government to take a cautious approach to changes in taxes and spending because of higher borrowing costs. Ryan, for his part, said the budget carries high political risks and may, in his view, provide for increases in certain taxes and larger volumes of debt borrowing.
