Sterling Enters Correction Phase
The British pound (GBP) has begun to ease against the US dollar after recently hitting a 30-month high. As of now, the pound is trading slightly lower at $1.3273, following a notable 1.5% surge last week.
Factors Behind the Pound’s Strength
The pound’s recent gains were fueled by a rally in global equity markets and expectations of further interest rate cuts from the US Federal Reserve. The Fed’s 50 basis point cut last week has prompted investors to seek higher-yielding assets, increasing demand for sterling. This year, the pound has emerged as the top performer among the Group of 10 currencies, with market expectations for additional gains reaching their highest levels in nearly a decade.
Uncertainty Ahead
Despite its recent strength, uncertainty surrounding the upcoming UK budget may put pressure on the pound in the weeks to come. Analysts caution that traders might look to lock in profits after the currency’s strong rally, potentially leading to a decline.
“I think the pound-dollar pair is living on borrowed time,” remarked Tim Graf, head of EMEA macro strategy at State Street. He believes the pound could weaken against the dollar in the next three to six months.
Challenges for Sterling
Nick Andrews, a senior currency strategist at HSBC, predicts further challenges for the pound. He expects investors to revise their outlook, factoring in deeper interest rate cuts from the Bank of England. Andrews estimates that 225 basis points of cuts may be necessary by the end of 2025, compared to the 150 basis points currently anticipated by the market.
While the slower pace of rate cuts in the UK has made the pound attractive to yield-seeking investors, Matthew Landon, global market strategist at JP Morgan Private Bank, advises caution. He states that there is “little sense to chase these moves higher over the near-term.”
Related topics:
