Sterling edged lower on Friday but remained close to its two-and-a-half-year high against the dollar, buoyed by increased risk appetite following China’s stimulus measures and policy divergence between the Bank of England (BoE) and other major central banks.
Pound vs. Dollar Trends Amid Policy Divergence
The GBP/USD pair dropped by 0.25%, trading at $1.33815, but stayed near this week’s peak of $1.3434, the highest level since February 2022. The pound typically strengthens when investors shift towards riskier assets, such as equities, which surged on Thursday.
Sterling is on track for its second consecutive week of gains against the U.S. dollar, supported in part by the policy rate differential between the U.K. and the U.S. However, ING analyst Francesco Pesole cautioned that GBP/USD may soon appear overvalued, as expectations for a 50 basis point Fed rate cut could be overestimated.
Sterling Holds Steady Against the Euro
Against the euro, the pound held firm at 0.83385, set for its third consecutive week of gains. The EUR/GBP pair has dropped about 3.8% year-to-date, with the euro losing ground as British inflation remains stickier than expected, fueling expectations for a slower BoE easing cycle. Analysts predict the pair may soon test the 0.8300 level unless there’s a surprising inflation rise in the Eurozone.
U.K. Budget Concerns and Market Sentiment
Finance Minister Rachel Reeves is due to present her first budget on October 30, sparking concerns over potential tax hikes, including capital gains tax and national insurance contributions, which could impact investor sentiment. However, Rabobank strategist Jane Foley noted that the market remains relatively “relaxed,” expecting the BoE to cut interest rates only gradually, likely once per quarter. This has provided some ongoing support for sterling, which may continue to outperform the euro.
