Pound Sterling: Falling Bond Yields Cap Advance Against Euro And Dollar

PoundSterlingLIVE – Pound Sterling’s rally against the Euro and Dollar has been checked by a fall in UK bond yields as investors maintain bets for Bank of England rate cuts in 2024.

Money market pricing shows investors are now fully signed up for three rate cuts from the Bank of England in 2024, which has pushed below 4% for the first time since May and kept exchange rates below the peaks of recent days.

“The timing of a first, fully priced-in rate cut moved from August to June in the last two days,” says Mathias Van der Jeugt, an analyst at KBC Bank

Bond yields fell as investors bought UK bonds, judging that inflationary risks have subsided to the extent that the will be able to cut interest rates in the coming months.

“UK gilts did best today, with yields shedding 3.1-8.1 basis points,” says Van der Jeugt.

The fall in UK bond yields weighed on Pound Sterling, although falls in yields in the Eurozone and U.S. have limited losses against the Euro and Dollar.

Indeed, it is more of a case of Sterling’s advance being handicapped by falling bond yields than an outright selloff: the Pound to Euro exchange rate holds levels near 1.17, and the current week’s high is at 1.1690. The Pound to Dollar exchange rate is 1.26, the week’s high is 1.2725.

The fall in UK bond yields signifies an easing in financial conditions in the UK, something the Bank of England has been loath of, fearing this will undo much of its work on lowering inflation.

It explains why most of the Bank’s Monetary Policy Committee have spoken out against expecting rate cuts in various appearances over the past three weeks.

“The Bank of England successfully kept markets betting on premature rate cuts on a leash, but the global force is strong,” says Van der Jeugt. “The fall-out on sterling from the latter remains limited though.”

The losses will remain limited as long as the weight on UK bond yields is global in nature, simply for the fact that this implies yields elsewhere are coming under pressure.

Markets now expect the ECB and Federal Reserve to cut interest rates ahead of the Bank of England. The downside in Sterling would build if Bank of England rate cuts are brought forward relative to the other central banks.

With this in mind, next week’s inflation reading could be decisive as a larger-than-expected fall could trigger such a development.

An original version of this article can be viewed at Pound Sterling Live