GBP – Pound strengthens on expected BoE policy divergence 

Key takeaways: 

– Pound initially undermined by BoE’s August rate cut 

– Strong UK data weakens bets for future rate cuts 

– GBP Monthly lows: €1.15, $1.26, AU$1.92, NZ$2.12, C$1.74 

– GBP Monthly highs: €1.19, $1.32, AU$1.98, NZ$2.15, C$1.78 

The pound initially stumbled in August, as the Bank of England (BoE) concluded its latest policy meeting with the announcement of its first interest rate cut since 2020. 

While hawkish comments from BoE Governor Andrew Bailey, at the bank’s accompanying press conference, initially helped to cap Sterling’s losses, a subsequent market selloff linked to US recession fears then applied fresh pressure to GBP exchange rates. 

The pound got caught up in the panicked selling as it prompted GBP investors to price in a faster pace of policy unwinding from the BoE through the remainder of 2024. 

However, Sterling sentiment then began to improve in the middle of August, as GBP investors welcomed a series of positive UK data releases, with the UK’s latest jobs, GDP and retail sales data all outpacing expectations 

Coupled with the subsequent release of stronger-than-expected UK PMIs, this caused investors to trim bets for a BoE rate cut in September and put Sterling on a path to appreciate steadily through the latter half of the month. 

Further support then followed as hawkish comments from Andrew Bailey towards the end of August signalled that the bank’s current cutting cycle is likely to be less aggressive than some of the other major central banks.  

Looking ahead, the expected divergence in policy between the BoE and both the European Central Bank (ECB) and Federal Reserve may act as a key pillar of support for the pound in the coming weeks and could see the currency test new multi-year highs against both the euro and US dollar. 

Any upside in Sterling may be compounded if GBP data continues to highlight robust activity across the UK economy.