Currency Market Update September 30th

The Pound

The pound has continued to gain ground against its major peers as we have moved through September reaching a notable high over 1.20 against the Euro for the first time in two and half years as investors expect that the Bank of England’s (BoE) policy-easing cycle will be slower than that of the Eurozone.

The BoE left interest rates unchanged during their September meeting and Governor Bailey has since commented that he is “very encouraged” by the downward path of inflation and said he was optimistic rates would fall further, but also said cuts would need to be gradual and the BoE needed "to be careful not to cut too fast or by too much".

Asked where interest rates would settle, Bailey said he did not expect them to return to the historic lows close to zero last seen four years ago. Investors are now pricing in one more rate cut for 2024 which will leave interest rates at 4.75%. As this is expected to be higher than the both the Eurozone and US, it will provide the pound with a lasting yield advantage meaning the pounds current strength may not be a flash in the pan.

The Euro

Prior to the BoE meeting, the European Central Bank also left interest rates unchanged during their September meeting. However, following a poor run of data investors are now concerned the ECB is at risk of pushing inflation below its 2% target by cutting interest rates too slowly, hurting the bloc's fragile economy.

Data this week showed euro zone business activity unexpectedly contracted in September with German businesses laying off staff at the fastest rate in over 15 years (other than during COVID). Investors are now pricing in a rate cut at the next meeting in October even though ECB policymakers have yet to signal one. This will leave one  further opportunity for a further rate cut in December.

The Dollar

The US Federal Reserve made a bold move by cutting interest rates by 0.5% at their September meeting. This was their first cut in more than 4 years with Chairman Jerome Powell saying the move was "strong" but necessary as price rises ease and job market concerns grow. He added that the aggressive action was intended to make sure that high borrowing costs, put in place to fight inflation, would not end up hurting the US economy commenting "The labour market is in a strong place - we want to keep it there".

Forecasts released by the Fed showed officials expect its key lending rate to drop to about 4.4% by the end of the year and 3.4% by the end of 2025. That is significantly lower than many were predicting as recently as June and points to another bigger than normal cut as soon as November.

Following the Fed meeting the Dollar has weakened with the pound gaining almost 4 cents in September alone taking the GBP/USD rate to the highest level since February 2022. The Euro has also gained against the Dollar albeit a more modest 2 cent gain.

In our last update we talked about the narrowing of polls in the US election race with Kamala Harris gaining ground on Donald Trump as another factor of Dollar weakness. In national polling averages tracked by the BBC she is now ahead of Trump, by 52% to 48% respectively. Although there are some conflicting polls it certainly suggests it is now an even closer race so this will continue to weigh on the Dollar over the next month.  

Adam Jordan