Sterling continued to strengthen against the dollar on Tuesday after the Bank of England’s decision last week to maintain its base interest rate, while US policymakers implemented a 0.5% rate cut.
The pound reached its highest level against the dollar in two years after Federal Reserve officials signalled that “many more rate cuts” are expected in the US.
Sterling edged up 0.1% to $1.337 following remarks from Austan Goolsbee, President of the Chicago Federal Reserve, who stated on Monday that interest rates need to be lowered “significantly” to safeguard the US job market and bolster the economy.
Goldman Sachs also revised its outlook for the pound, now forecasting it will rise to $1.40 over the next 12 months, up from a previous estimate of $1.32.
Meanwhile, sterling fell 0.1% against the euro, trading at 83.3p, despite increasing speculation that the European Central Bank (ECB) may speed up rate cuts as the eurozone economy weakens.
Overnight index swaps boosted the probability of an October rate cut to 41% on Monday, up from 26% at Friday’s close, with today’s odds climbing further to 53%.
Deutsche Bank analyst Jim Reid noted that “weakness in Europe has led investors to increase the likelihood that the ECB will accelerate their rate cuts and take action again at their next meeting in October.” He added that disappointing PMI data has heightened expectations that the ECB may shift from its quarterly rate cut pace to implementing cuts at every meeting.
