Sterling’s interesting start to February saw it hit a near five-year high on the US dollar and six-month high against the euro on Wednesday. It then drifted by some 2% against USD and just over 1% against EUR.
The pound’s sudden fall was caused by two things. Firstly, the Bank of England (BoE) surprised the markets by very nearly cutting interest rates – the vote was 5-4 – thereby signalling that they are more likely to cut next month. Secondly, there is the continuing risk that yet another prime minister could be forced out within only a couple of years of taking office, with all the uncertainty that brings. The likelihood that it would be a more overtly left-wing replacement prime minister may be worrying the market too.
Arguably, that eventuality has moved a step closer with the resignation of Keir Starmer’s chief of staff over the weekend. We will see what the markets make of that today.
Last week’s data was almost non-existent on the UK side, although house prices rebounded by 0.7% in January according to the Halifax, above £300,000 for the first time. However, the Bank of England predicted that with inflation predicted to go below 2% very soon, and that will encourage interest rate cuts and a boost to the market.
On the US side, JOLTs job openings were the lowest since September 2020. So it will be all eyes on non-farm payrolls on Wednesday. The likely next chair at the US Federal Reserve suggested that an AI-induced productivity boom would allow for interest rate cuts. However, a poll of economists poured cold water on this idea.
For Europe, inflation has already slipped below 2%, but the ECB was giving no signals that interest rate cuts are on the way.
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