The pound slumped to its lowest level in nearly two months on Monday as traders digested the implications of the latest round of central bank decisions last week.
Sterling fell to around $1.2520, down 0.84 per cent in the course of the day. This put it at its lowest level since mid-December.
The pound’s weakness was prompted by increasingly hawkish signals from the Fed.
With the US economy holding up surprisingly well against the Fed’s interest rate hikes, policymakers are pushing back directly against market bets on rate cuts. Last week, the Fed held interest rates on hold last week but said it needed “greater confidence” inflation was returning to target before lowering rates.
Lower rate expectations tend to hit currencies as it suggests investors will receive a lower rate of return on their investments.
A monster jobs report also pointed to the underlying strength of the US economy. The US added 350,000 new jobs last month, almost double the expected 180,000.
“This data clearly pushes back against the overriding narrative that the Fed will cut rates early and knocks a March cut off the table,” Chris Turner at ING commented.
According to CME’s Fedwatch Tool, markets think there is just a 14.5 per cent chance of a cut in March’s meeting.
This has fallen from a high of over 90 per cent at the end of last year.
While the Bank of England also pushed back on the timing of rate cuts last week, rate-setters all but confirmed that the next move for rates would be down.
Compared to the hawkish signals from the Fed, this weakened sterling. Lower rate expectations tend to hit currencies as it suggests investors will receive a lower rate of return on their investments.
“The Bank of England is also in wait-and-see mode,” Susannah Streeter, head of money and markets at Hargreaves Lansdown said. “But the stance has changed, with policymakers opening the door to potential interest rate cuts”.