Sterling under pressure: Differences in policy between UK and US central banks point to new exchange rate risks

Meanwhile, the dollar underperformed as U.S. PMI dropped to its lowest level in four months, raising hopes that anti-inflation rhetoric in the U.S. has not completely disappeared.

Huitong Finance APP News – The pound rebounded on Tuesday as the UK PMI report was stronger than expected, showing that the economy accelerated its rebound in April. At the same time, a key member of the Bank of England gave a speech, cooling market expectations that a recent interest rate cut was imminent.

Huw Pill, chief economist of the Bank of England, warned that there has been no change in the Bank of England\’s interest rate stance and that the risk of easing monetary policy too early is greater than too late.

Meanwhile, the dollar underperformed as the U.S. PMI fell to its lowest level in four months, raising hopes that anti-inflation rhetoric in the U.S. has not completely disappeared.

George Vessey, chief currency strategist at Convera, said: \”The market is slightly resistant to the policy divergence view that has driven the dollar higher this year.

Despite ample evidence that the U.S. economy continues to outperform its global peers, business activity data released by S&P Global showed that U.S. economic activity expanded at the slowest pace in four months in April.

\”After the data was released, money market assessments showed that investors now expect the Federal Reserve to cut interest rates by 25 basis points twice this year, sending U.S. bond yields and the dollar lower.

Vessey said: \”GBP/USD has recovered more than 1 cent from Monday\’s five-month low of around $1.23, but remains in a downward channel since mid-March.

\”From now on, changes in expectations for U.S. interest rate cuts will ultimately determine the direction of the dollar, with most analysts warning that the greenback could strengthen further.

An analysis from ING found that further underperformance of GBP/USD is \”a definite near-term risk\”.

Chris Turner, FX strategist at ING, said he expected the wider divergence between the Bank of England and the Federal Reserve\’s rate-cutting cycles to \”pressure on GBP/USD in particular.\”

The Bank of England looks set to cut interest rates in June or August, ahead of the Fed.

Joseph Capurso, an analyst at Commonwealth Bank (CBA), pointed out that some market analysts are now optimistic about the prospect that the Federal Reserve will raise interest rates again after a long period of stability.

The CBA still expects a rate cut to be the next step, but warned that if the Fed raises interest rates, it will be at least two.

Capurso said: \”Resuming interest rate hikes will obviously support the dollar because the rate hikes are not priced in.

ING\’s Turner said that as the Bank of England\’s bets on interest rate cuts increase, the interest rate gap between the United States and the United Kingdom further narrows, which will help the pound weaken further against the dollar.

He said: “In an extreme scenario, such as a 50 basis point move in the one-year GBP/USD swap spread favoring a more accommodative Bank of England policy, the relationship since early 2023 suggests GBP/USD should be closer to 1.21.

In short, further underperformance of GBP certainly seems to be a near-term risk.

” Source of daily chart of GBP/USD: Yihuitong GBP/USD reported 1.2495/95 at 15:04 Beijing time on April 25

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