By James Caley
In a widely anticipated move, the Bank of England’s monetary policy committee voted to reduce interest rates by 0.25% yesterday. What came as a surprise, however, was the immediate strengthening of the British pound against most major currency pairs following the announcement. Typically, such a reduction in interest rates would be expected to weaken a currency, yet several key factors have influenced the market dynamics this time around.
The Bank of England’s commentary was noteworthy: “Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate.” This statement suggests a thoughtful and measured strategy moving forward, indicating further reductions may not be imminent.
A significant factor contributing to the current market movement is the outcome of Rachel Reeves’ first Budget. The Bank has projected that the fiscal policies introduced in this Budget may lead to a rise in inflation by around half a percent, an increase that could pose challenges for economic stability. Additionally, forecasts indicate that GDP is expected to slow down in the latter part of the year, creating a cautious outlook for future monetary policy.
Given these circumstances, the prospect of another interest rate cut in December, which some analysts had speculated, now appears diminished. This sentiment has been eagerly embraced by investors, resulting in a surge in demand for the pound. As a result, the GBPEUR exchange rate has reached notable heights, marking one of the highest rates we’ve seen in 2024.
The strengthening of the pound was not limited to the euro; the currency also gained against the US dollar. Following initial boosts in dollar strength after Trump’s election win, the pound made a significant recovery yesterday, appreciating over a cent during the afternoon trading session.
Furthermore, the pound showed resilience against other currencies, including the UAE dirham, New Zealand dollar, and Canadian dollar, reinforcing the positive momentum following yesterday’s announcement.
In summary, despite the interest rate cut, an event that typically signals a weaker currency, the broader economic context, coupled with strategic market reactions, has resulted in a notable strengthening of sterling across multiple currency pairs. As we move forward, it will be essential to monitor the implications of the recently passed Budget, along with inflation rates and GDP growth projections, all of which will undoubtedly impact the currency landscape in the coming months.