Pound sterling suffers as traders pare bets on Fed rate cuts
Sterling has continued to suffered throughout today, falling to a 14-month low against the dollar amid a global sell-off prompted by concerns that the US Federal Reserve will only cut interest rates once this year.
The pound was trading as much as 0.8 per cent lower against the dollar this morning, dropping to $1.211 around midday, before recovering slightly in the afternoon.
The poor performance of the pound has continued its streak as the worst performing currency in the G10.
“Sterling continues to trade on a soft footing and its losses could extend this week,” Chris Turner, an FX analyst at ING said, suggesting the pound could fall to as low as $1.20.
The sell-off comes after a bruising week for UK assets last week, with sterling falling over three per cent and gilt yields picking up to the highest levels in decades.
Traders have bet against the UK due to fears that the government’s Budget will push up inflation, slow growth, and force the Bank of England to cut interest rates at a slower pace than previously expected.
Gilt yields picked up again on Monday too, with the yield on the 10-year gilt rising by four basis points to 4.87 per cent and the yield on the 30-year gilt rising by 12 basis points to 5.53 per cent.
But the sell-off in the UK comes amid wider market pressures, as investors reassess how much the Fed will be able to cut interest rates in 2025.
A blow-out jobs report last week suggested that the world’s largest economy continues to grow at a striking pace while the threat of Donald Trump’s tariffs has raised fears about further inflationary pressures.
“The US labour market is too hot to allow for any Fed easing soon,” analysts at Barclays said.
Markets expect just one rate cut from the Fed this year.
Higher rates in the US contribute to a stronger dollar, because investors can earn a higher return on US assets relative to other jurisdictions.
The dollar index – which weighs the greenback against major currencies – reached its highest level since November 2022 on Monday.
Expectations of higher interest rates in the US also push up bond yields around the world, because the US federal funds rate acts as a benchmark for lending in the global economy.
Government bond yields have increased across all advanced economies in recent weeks, although UK gilts have performed slightly worse than peers.
“European bonds are victims of the climb in US yields, which is sucking capital into the US,” Mathieu Savary, chief European strategist at BCA research, said.