The British pound experienced a decline against a strengthening US dollar on Wednesday, despite initial resilience to British data, as investors awaited the outcome of the Federal Reserve’s policy meeting. The pound’s resilience was notable against the Japanese yen, reaching an 8-1/2-year high, buoyed by the Bank of Japan’s decision to exit its negative interest rates policy, which made higher-yielding currencies like the pound more attractive compared to Japanese assets.
Against the dollar, the pound was down 0.2% at $1.2696, while the euro remained flat at 85.39 pence. However, sterling saw gains against the yen, reaching a fresh high of 192.84 and ending up 0.7% at 192.61.
British inflation figures for February indicated a slowdown, which kept the Bank of England (BoE) on course to potentially start cutting interest rates in the coming months. British finance minister Jeremy Hunt suggested that these figures could “open the door” for a monetary easing by the BoE. Market participants slightly increased their expectations of BoE monetary easing, with the probability of a first move in June rising to approximately 63% from 58% before the release of the data.
Analysts anticipated that the Federal Reserve would maintain its rates unchanged following its meeting, with attention focused on signals regarding the timing and extent of any potential easing throughout the year. Regarding the BoE, analysts predicted that it would keep investors guessing about the timing of potential rate cuts.
Ruben Segura-Cayuela, European economist at BofA, emphasized the expectation for no changes to the BoE’s guidance. He noted that the focus would likely remain on factors such as sticky services inflation, ongoing wage negotiations, and the impact of the upcoming increase in the national living wage.
Despite the pound’s recent strength, concerns were raised about the sustainability of its performance, particularly in 2024. Dominic Bunning, head of European forex research at HSBC, highlighted the pound’s stretched positioning, with the existing net long position reaching its largest on record at $5.632 billion. Bunning cautioned that such levels of positioning could be vulnerable to any potential dovish shift by the BoE. He also pointed out that the pound had been the best-performing G10 currency relative to the US dollar year-to-date.
Overall, while the British pound initially showed resilience in the face of economic data, its performance against the US dollar was overshadowed by concerns about potential monetary policy shifts by both the Federal Reserve of USA and the Bank of England. Investors remained cautious, particularly regarding the sustainability of the pound’s recent strength and the potential impact of any changes in central bank policies.
