Home Daily Commentaries Pound trades with caution as the Bank of England looks to cut interest rates next month

Pound trades with caution as the Bank of England looks to cut interest rates next month

Conor Fleming
Written by
Conor Fleming

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor spearheads initiatives to encourage businesses in Germany, Switzerland, and Austria to hedge their foreign currency risks with OFX.

| Thursday 23 January, 2025

Daily Currency Update

The Pound performed strongly vs its peers yesterday, rising over 1%, as the market turned favourable for risk-perceived currencies amid considerable ambiguity over Trump's tariff plans. However, as we mentioned earlier this week, inflationary wage growth is a major problem for the Bank of England as they are expected to reduce rates at their next meeting in February but wage growth rose at a robust pace of 5.6% having printed 5.2% the previous month. The key question is whether they will support growth or tame inflation.

European Central bank policymaker, Jose Luis Escriva, said on Wednesday that a "25 basis point cut in rates at their next meeting is the most likely scenario". He added that the ECB need to wait for more hard data to confirm future forecasts but that all signs point toward inflation normalising at their preferred 2% target rate. It is also unclear if there will be material effects to inflation from US policy actions under the Trump administration and so the ECB must remain nimble.

The US Dollar has been trading rather quietly as the market ponders the size and effect of announced tariffs on multiple trading partners. The US economic calendar is also quiet as Federal Reserve officials remain in a blackout period before their January 29th policy decision. Markets have priced a 55.7% chance that US borrowing costs will remain unchanged at their upcoming meeting.

Key Movers

ECB President, Christine Lagarde, said they are "not overly concerned" about the US exporting inflation to Europe. She added that even if that happens the ECB will continue to cut rates gradually through 2025 to support growth. Lagarde also said that if inflation does ramp higher in the US on account of the US administration’s policy actions, it will be very interesting to see what happens to both the Euro and the Dollar. She said that; "the ECB take the view that growth in the US is good for Europe and the World economy".

In the UK, December's budget figures revealed a wider than expected deficit driven largely by increased debt interest payments. Borrowing rose to 17.8 Billion, far exceeding the expected 14.1 Billion. These figures underscore the uphill battle for Chancellor Rachel Reeves, as the UK navigate mounting fiscal pressures  which in turn will leave the Pound vulnerable to increased volatility.

There were no major data releases yesterday in the US and markets focused on the US administrations economic strategy. The US ten year bond yield retreated to 4.56% which in turn pushed the US Dollar lower but unease over tariff plans put a halt to the Dollar’s slide. It seems clear that the long Dollar trade is overcrowded and modest liquidation of positions is the most likely scenario before the Dollar renews it uptrend.

Expected Ranges

  • GBP/USD: 1.2275 - 1.2340 ▼
  • GBP/EUR: 1.1805 - 1.1855 ▼
  • GBP/AUD: 1.9600 - 1.9655 ▼
  • EUR/USD: 1.0370 - 1.0425 ▼

Written by

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor first embarked on his financial career journey as a trainee dealer in BNP Paribas in the early 90s. His professional journey also took him to New York, where he assumed the role of Head of Sales with an Irish bank for a few years. During his tenure at both banks, he was invited to several interviews on Irish television to discuss market turbulence, the factors driving volatility and insights into what could be expected as events unfolded.

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