The pound hit a fresh five-month low versus the euro on Monday, even as it rose against a weakening dollar, as recent economic data and comments from a Bank of England official led investors to increase their bets on future BoE rate cuts.
Last week, data showed British retail sales fell by 0.3 per cent in December while analysts expected a rise, core measures of consumer price growth fell sharply, and rate setter Alan Taylor said he expected the BoE to cut rates four times in 2025.
Markets are currently pricing 62 basis points of rate cuts in 2025 from around 40 bps before the inflation data.
Concerns about the UK’s fiscal outlook put pressure on the British pound and bond prices two weeks ago. However, after recent data, investors shifted their focus back to the so-called monetary policy divergence from the Bank of England and other major central banks.
The pound fell 0.3% against the dollar to $1.2197, not far from the 14-month low it touched on Monday.
The US dollar dropped on Monday before Donald Trump’s inauguration as US president later in the session, with investors focusing on policy announcements that could immediately affect the greenback. “Inflation coming in lower than expected in December and a generally weaker tone in the latest economic releases has revived the prospect of Bank of England cuts, which, of course, is not helping the pound,” said Enrique Diaz Alvarez, chief financial risk officer.
“This week’s labour report and PMI data are key, particularly the latter,” he added.
Investors will focus on November’s wage numbers, due on Tuesday, and any evidence of a more sustained acceleration. Meanwhile, they expect further moderation from the Friday Purchasing Managers’ Index data for January on Friday and the GfK consumer confidence indicators.
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