(Bloomberg) -- The pound gained as traders pared bets on further Bank of England monetary easing this year, with the outlook for price pressures clouded by increased UK government spending.
Sterling rose as much as 1% to $1.3009, the biggest move since September, as policymakers voted to cut interest rates by a quarter point as expected on Thursday. The gains were mostly driven by a broad-based selloff in the dollar, and almost erased a drop that followed the US presidential election.
BOE officials said that borrowing costs will likely continue to fall gradually if the economy evolves as expected, validating market pricing that this was the last rate cut of 2024. The central bank also warned that additional spending announced by the UK government last week will drive up inflation by as much as half a percentage point.
“The hawkish cut by the BOE could help the pound regain some ground, especially versus low-yielders like the Japanese yen, Swiss franc and euro,” said Valentin Marinov, head of G10 FX research at Credit Agricole. The sterling-dollar pair “should remain a function of the US dollar moves.”
The BOE’s path to further easing has been complicated both by Chancellor of the Exchequer Rachel Reeves’ Oct. 30 budget and the election of Donald Trump as US president. The UK now plans a £70 billion ($90.4 billion) a year spending binge, almost half of which is financed by borrowing. Trump is threatening higher tariffs in a new global trade war.
Markets are now pricing around a 15% chance of another BOE quarter-point cut in December, from 25% before the decision. Further ahead, swaps imply two more cuts in 2025 with a high chance of a third. That’s less than what’s expected from the European Central Bank and the Federal Reserve — the latter announces its decision later on Thursday and a 25-basis-point cut is expected.
“The pace of cuts from here has been muddied by recent political developments,” said Zara Nokes, global market analyst at J.P. Morgan Asset Management, referring to the BOE. “The UK economy is now contending with a number of cross-currents which make the growth and inflation outlook highly uncertain.”
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