Sterling falls on rate cut hopes, Reeves’ speech

The pound sterling dropped to its lowest level in two weeks on Monday as investors awaited the Bank of England’s (BoE) interest rate decision later this week and a key speech by Finance Minister Rachel Reeves.

Sterling fell 0.25 per cent to $1.2834, touching $1.2807 earlier, its lowest since July 10, while the euro gained 0.11 per cent against the pound, reaching 84.46 pence.

Market expectations shifted, with traders now pricing in a nearly 60 per cent chance of a BoE rate cut on Thursday, up from just over 50 per cent late last week.

This adjustment in rate forecasts led to lower British bond yields, which weighed on the pound. ING’s Francesco Pesole noted that the FX market might be catching up with bond market adjustments, suggesting that a rate cut could significantly impact the pound.

Investors are also anticipating Reeves’ speech, where she is expected to accuse the previous Conservative government of leaving a £20 billion ($26 billion) shortfall in public finances.

Senior FX salesperson Neil Jones warned that potential tax increases could negatively affect global investor sentiment. Uncertainty surrounding the BoE’s decision has been compounded by political factors, as key policymakers have remained silent ahead of the July 4 election.

Despite inflation returning to the 2 per cent target, strong growth in service prices and wages might lead some BoE officials to favour maintaining the current 5.25 per cent rate for longer.

Attribution: Reuters