Sterling faced sharp declines on Thursday as market sentiment shifted due to monetary policy expectations and economic challenges in the UK.
🌍 Key Highlights
Sterling vs. Yen: Fell 0.77% to ¥189.72, a 1.5-month low, following speculation about Bank of Japan (BoJ) rate hikes in 2025
Sterling vs. Dollar: Dropped 0.25% to $1.22, near a two-month low of $1.2097 hit earlier this week.
Sterling vs. Euro: The euro climbed 0.3% to 84.31 pence, approaching a four-month high.
💡 Key Drivers of Sterling Weakness
1️⃣ Monetary Policy Divergence:
Bank of Japan: Governor Kazuo Ueda signaled a debate on raising rates next week, sparking a yen rally.
Bank of England: Markets anticipate rate cuts in 2025, with 59 basis points priced in
2️⃣ UK Economic Challenges:
Slower-than-expected economic growth in November.
Heavy government bond supply and fiscal concerns weigh on asset prices.
3️⃣ Inflation Data:
UK inflation slowed unexpectedly last month, easing pressure on the Bank of England to maintain higher rates.
📊 Bond Market Impact
10-Year UK Gilt Yields: Fell 2 bps on Thursday after dropping 14.5 bps the day before, following weak inflation data.
Bond yields continue to reflect UK fiscal pressures and monetary policy uncertainty.
🧐 Analyst Views
Paul Mackel, HSBC:
"Sterling found some short-term stability due to inflation numbers, but fiscal dynamics remain a concern. We expect continued struggles versus the dollar."
Alan Taylor, BoE Rate Setter:
"The Bank should act swiftly to cut rates given signs of an economic slowdown."
🔮 Outlook
Sterling’s near-term outlook remains cautious as investors focus on:
BoJ’s potential rate hike decision next week.
Bank of England’s policy shift and fiscal headwinds.
Broader macroeconomic indicators and geopolitical developments, including Donald Trump’s inauguration.