December 20, 2024 – Written by David Woodsmith
STORY LINK Pound Sterling Dips Against Euro and Dollar on Surprise BoE Vote Split
A narrower-than-expected Bank of England (BoE) vote in favour of holding interest rates at 4.75%, triggered a Pound sell-off on Thursday.
The Pound was also undermined overnight by wider dollar gains.
A hawkish Fed statement had help cut market expectations of a February BoE cut to below 50%, but this was reversed after the BoE statement.
The Pound to Dollar exchange rate (GBP/USD) dipped to 1.2600 from earlier highs around 1.2660, although it held above 3-week lows near 1.2560 posted overnight.
The Pound to Euro exchange rate (GBP/EUR) touched 1.2100 from 1.2140.
The BoE Monetary Policy Committee (MPC) held interest rates at 4.75% which was in line with consensus forecasts.
There was, however, a surprise surrounding the vote with a 6-3 split for the decision compared with expectations of 8-1.
Dhingra, Ramsden and Taylor all voted to cut rates by a further 25 basis points.
The majority pointed to significant uncertainty over the inflation outlook and supply-side issues, particularly after the National Insurance increases. In this context, they wanted more time to assess developments and continued to back gradual policy easing.
There was no change in the formal guidance with comments that; “A gradual approach to removing monetary policy restraint remains appropriate.”
It added; “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
According to Governor Bailey; “With the heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year.”
The minority considered that policy was too restrictive and a cut was warranted, especially with domestic and international growth risks skewed to the downside. They also considered that the current policy would push inflation too far below the 2% target.
The BoE also stated that growth was slightly weaker than expected and there were risks from potential US tariffs.
The vote split strengthened expectations of a February rate cut, especially as one of the six members who voted for unchanged rates (probably Bailey) appeared close to backing a cut this time around.
Traders also moved to price in three rate cuts in 2025 from two previously while bond yields declined.
According to Chris Scicluna, Head Of Economic Research at Daiwa Capital Markets; “The UK economy is behaving far more like the euro zone economy than the U.S. one. I expect a cut in Feb when the BoE updates its projections.”
Overnight, the Federal Reserve lowered interest rates by 25 basis points to 4.50% which was in line with expectations.
There was, however, a shift in interest rate forecasts by individual committee members with the median forecast that there would be only two rate cuts for 2025 compared with four cuts in the previous update from September.
Fed Chair Powell also noted that a slower pace of interest rate cuts is justified given slightly stronger growth and some disappointing inflation data.
ING commented; “we think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year.”
According to MUFG; “Building expectations for wider policy divergence alongside the looming risk of higher tariffs being imposed at the start of Trump’s second term as president will keep upward pressure on the US dollar heading into next year as it becomes even more overvalued.”
A stronger dollar would continue to hamper GBP/USD.
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