Currency Update: Sterling’s Gains Amid Economic Data
On Tuesday, Sterling saw an uptick against both the euro and the dollar, recovering from recent declines. This shift came as British economic indicators fueled expectations that a Bank of England rate cut may be delayed, while traders turned their attention to forthcoming U.S. data.
The unemployment rate in Britain climbed to its highest since early 2021, while the S&P Purchasing Managers Index (PMI) rose to 52.1 in December, surpassing forecasts from a Reuters poll, although it still fell short of long-term averages.
Two-year bond yields, sensitive to Bank of England policy, increased by 1.5 basis points to reach 3.77%, having gained 1 basis point just prior to the PMI announcement.
Markets are currently anticipating a rate cut of around 60 basis points by the central bank by the year’s end, with a roughly 90% chance of a rate reduction occurring at the upcoming Thursday meeting.
Sterling climbed 0.25% to $1.3410 and up 0.35% against the euro to 87.59 pence, recovering slightly from a low of 87.89 pence, the lowest seen since December 3.
Meanwhile, the US dollar index dropped, and the euro appreciated modestly against the dollar.
“We maintain our belief that the central bank will initiate rate cuts more rapidly than current market predictions, potentially lowering the bank rate to 3% by the end of 2026. The PMI results don’t alter that perspective,” noted Modupe Adegbembo, an economist at Jefferies.
He further remarked, “While the composite index improvement is promising, it still signals a slowdown in UK growth,” warning that the real threat lies in a worsening labor market.
Barring any significant surprises before Thursday’s decision, most analysts expect a 5-4 vote to lower the benchmark interest rate to 3.75% from 4.0%, as indicated by a Reuters poll.
The inflation rate for November’s Consumer Price Index (CPI), scheduled for release on Wednesday, will be a crucial piece of information.
“We recently downgraded our growth and inflation forecasts for 2026 as our concerns have shifted from enduring price pressures to an increasing likelihood of weak demand,” commented Andrew Wishart, an economist at Berenberg. “Indications of rising job losses affirm our stance,” he added, anticipating three rate cuts in 2026, backed by PMI data.
