Pound Sterling has maintained its positive momentum due to constructive market sentiment and contrasting speeches from Andrew Bailey and Jerome Powell on Friday. However, we anticipate that further outperformance will be more muted in the near term. Bank of England Governor Andrew Bailey’s remarks that it is “too early to declare victory” over inflation have supported market expectations that the Bank will skip another rate cut in September. In contrast, both the European Central Bank and the Federal Reserve are expected to cut rates in September, with potential further cuts before year-end. This slower path of cuts from the Bank of England provides fundamental support for the Pound against both the Euro and Dollar.
Constructive global market sentiment has been another key driver behind the Pound’s recent outperformance. Friday’s jump in stocks propelled the UK currency to new highs against the Dollar and bolstered its recovery against the Euro. The Pound to Euro exchange rate rose above 1.18, while the Pound to Dollar pairing reached 1.32. Over a one-week period, the Pound has been the best-performing G10 currency and remains 2024’s best performer. However, Monday saw markets give back some recent gains, particularly against the U.S. Dollar, due to losses centred on the U.S. technology sector ahead of Nvidia’s midweek results announcement.
Disappointment in Nvidia’s performance could bolster the Dollar from recent levels, but we do not see this significantly impacting Pound exchange rates. Pullbacks in GBP/USD are likely to be shallow as long as the market expects the Federal Reserve to deliver several interest rate cuts in the coming months. Looking ahead, we expect the Pound’s outperformance to be more muted, with GBP/USD potentially capped at 1.32 in the near term. The exchange rate has become overbought in the short term, and some unwinding is necessary. Monday’s losses in GBP/USD linked to the U.S. tech sector selloff suggest a broader market pullback will temporarily weigh on the UK currency.
Meanwhile, GBP/EUR is now in its fifth daily advance, which is unusual for this exchange rate. GBP/EUR is a slow mover with a mean-reverting tendency, and some softening is possible if global markets face a setback. We will be watching inflation data from the Eurozone this week, with Germany’s data on Thursday and all-Eurozone data on Friday. Any undershoot in these data could potentially boost expectations for ECB rate cuts, which would, in turn, weigh on the Euro.
