British Pound Weakens on Rate Cut Speculation and Rising Budget Deficit

Pound Surges As U.K. Retail Sales Rise Unexpectedly

The British pound declined against major currencies during the Asian trading session on Wednesday, as market participants speculated on a potential Bank of England (BoE) rate cut in February. Softer-than-expected economic growth and easing inflation have heightened expectations of a 25 basis point rate cut, which would bring the BoE’s key interest rate to 4.50%.

Key Economic Developments

  1. Slowing Economic Growth and Eased Inflation
    Recent data pointed to sluggish economic performance and unexpectedly lower inflation, fueling speculation of monetary policy easing.
  2. Widening UK Budget Deficit
    • Public Sector Net Borrowing: Rose £10.1 billion year-on-year in December to £17.8 billion, the highest December figure in four years.
    • Interest Payments: Central government debt interest totaled £8.3 billion, surpassing the £7.8 billion forecast by the Office for Budget Responsibility (OBR).
    • Fiscal Year-to-Date Borrowing: Reached £129.9 billion, a £8.9 billion increase from the prior year.
    This fiscal strain further compounds the UK’s economic challenges, making a rate cut more probable to support growth.

Pound’s Performance Against Major Currencies

Euro (EUR/GBP)

  • Fell to 0.8458 from an early high of 0.8434.
  • Support Level: Likely around 0.86.

US Dollar (GBP/USD)

  • Declined to 1.2312, down from 1.2354.
  • Support Level: Anticipated near 1.27.

Swiss Franc (GBP/CHF)

  • Dropped to 1.1163 after reaching a one-week high of 1.1197.
  • Support Level: Around 1.10.

Japanese Yen (GBP/JPY)

  • Dipped to 191.90 from a high of 192.43.
  • Support Level: Expected near 188.00.

Market Outlook and Future Data Releases

The pound’s trajectory is influenced by BoE rate cut speculation, fiscal concerns, and global market trends. Key upcoming data that may impact currency movements include:

  • U.S. MBA Mortgage Approvals
  • Canadian PPI and Raw Material Prices
  • U.S. Leading Economic Index for December
  • Redbook Retail Sales Data

Conclusion

The British pound’s weakness reflects market expectations of monetary easing amid fiscal and economic challenges. Traders are closely monitoring developments ahead of the BoE’s February policy meeting, with further declines possible if rate cut expectations persist or global risk sentiment deteriorates.

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