Sterling dipped slightly against the U.S. dollar on Monday but reached a new two-year high against the euro, reflecting divergent economic trends between the
UK and the eurozone.
The British pound fell by 0.2% to $1.3298, staying just below the more than two-year peak it had hit against the dollar on Friday. However, it gained strength against the euro, with the euro/sterling pair sliding 0.3% to 83.59 pence, the weakest level for the euro since August 2022.
A survey released on Monday showed a slowdown in British business growth, with waning price pressures that could encourage the Bank of England (BoE) to consider additional rate cuts. The UK's S&P Global Composite Purchasing Managers' Index (PMI) dropped to 52.9 in September, slightly below economists' forecast of 53.5, but still above the 50-mark that separates growth from contraction.
In contrast, eurozone PMIs fell sharply, with the index sinking to 48.9 from August's 51.0. Germany's economic decline deepened, and France saw a return to contraction after a temporary boost in August tied to the Olympic Games. This divergence in economic performance has bolstered sterling against the euro.
Market expectations suggest that traders are betting on 44 basis points of rate cuts from the European Central Bank (ECB) by the end of the year, compared to 40 basis points of easing from the BoE. The ECB has already reduced rates twice this year, while the BoE has only cut rates once. Last week, the BoE kept rates steady at 5.0%, signaling caution on further rate cuts amid signs of economic resilience and persistent price pressures in the service sector.
"Over the past two years, no G10 economy has exceeded data expectations as much as the UK. Combined with high real interest rates, this has positioned sterling favorably," FX strategists at Deutsche Bank said in a note.
Meanwhile, British Finance Minister Rachel Reeves reaffirmed there would be no return to austerity or widespread budget cuts, despite a challenging fiscal outlook. Reeves indicated that taxes are likely to rise in her upcoming budget on October 30 to address a £22 billion ($29 billion) shortfall in public finances. Photo by Abxbay, Wikimedia commons.