The British pound demonstrated resilience on Monday, outperforming the US dollar and several other major currencies, except for the yen. Investor sentiment is increasingly bullish on the pound’s prospects for the upcoming year.
As of the latest data, the pound was trading at $1.27, reflecting a 0.42% increase against the US dollar. Against the euro, the pound gained 0.19%, with an exchange rate of 86.18 pence per euro.
Over the past three months, the pound has surged by approximately 2.5%, primarily fueled by growing optimism that the US Federal Reserve will soon implement interest rate cuts.
This optimism has created a divergence between British bond yields and their American counterparts, making UK fixed income assets more appealing to investors.
Jane Foley, Head of FX Strategy at Rabobank, explained, “The prevailing view that Bank of England rate cuts will be lagging those of the Fed in 2024 has supported the pound.”
Market expectations currently anticipate around 120 basis points of rate cuts from the Bank of England (BoE) in the coming year, compared to nearly 150 basis points expected from the Federal Reserve.
Many experts, including Foley, believe that the pound can continue to benefit from this disparity in rate expectations.
Foley stated, “We see scope for cable to track up to $1.30 on a nine-to-12 month view on rate differentials.”
Goldman Sachs is even more optimistic, predicting that the pound could reach $1.35 within 12 months.
This forecast marks a significant turnaround from just over a year ago when the pound hit a historic low of $1.0327 due to a tumultuous government budget.
Looking ahead, traders are awaiting British inflation data for November, which is scheduled for release on Wednesday.
It is expected that headline inflation will have eased to 4.4% year-on-year from October’s 4.6%.
Despite inflation running higher in the UK compared to the US and the Eurozone, the Bank of England resisted rate cut expectations last week, with BoE Deputy Governor Ben Broadbent stating that it’s too early to determine if wage growth, a factor contributing to inflationary pressure, is on a declining trend.
In the broader context, the US dollar index, which tracks the currency against six major peers, remained relatively stable on the day at 102.51.
Meanwhile, the yen depreciated by more than 1% following the Bank of Japan’s decision to maintain its ultra-loose monetary policy.