The Pound fell from the two-year peaks it reached against the Dollar but gained further against the Euro on Wednesday as investors concentrated on the potential differences in monetary policies between the US and the UK.
Sterling declined by 0.3% to $1.3218, after reaching its highest level since 22nd March at $1.3269 on Tuesday. It is also set to achieve a 3.2% increase for August, marking its largest monthly gain since November 2023.
Soft economic data from the US and comments from Federal Reserve Chair Jerome Powell last week have increased expectations that the Federal Reserve will soon begin a series of interest rate cuts, leading to a decline in the Dollar against various currencies, Reuters reports.
Meanwhile, the Pound gained from stronger domestic economic data and a measured stance on further rate cuts expressed by Bank of England (BoE) Governor Andrew Bailey last week.
In early August, the Bank of England reduced its main interest rate by 25 basis points to 5%, and traders are anticipating additional cuts totalling 41 basis points by the end of the year.
However, market expectations suggest that the Federal Reserve might lower rates by 103 basis points over its remaining three policy meetings this year, with traders also considering the possibility of a substantial 50 basis point cut in the upcoming month.
On Tuesday, Prime Minister Keir Starmer stated that it would take a considerable amount of time to restore Britain and address the issues he attributes to the previous Conservative government. He cautioned that “things will get worse before they get better.”
“The markets seem to be focused on diverging monetary policies but diverging fiscal policies (mild consolidation in the UK vs on-going laxity in the US) will possibly mean less divergence in monetary policy than markets are pricing,” according to Colin Asher, senior economist at Mizuho.
The Pound increased against the Euro for the sixth consecutive session on Wednesday, reaching a near one-month high. The Euro/Sterling exchange rate was down 0.2% at the time of writing at 84.18 pence per Euro.