Pound Sterling tumbles as fading Fed rate-cut hopes dampen market mood

Pound Sterling remains under pressure as the Fed’s hopes for an early rate-cut wane.
The UK’s poor economic prospects could force the BoE to lean towards loosening policy.
The S&P Global Services PMI came out better than expectations.

The Pound Sterling (GBP) continues to face the wrath of dismal market sentiment in the European session on Monday. The GBP/USD pair drops sharply as resilient United States Nonfarm Payrolls (NFP) data on Friday have dented expectations of a rate cut from the Federal Reserve (Fed) at March’s monetary policy meeting. The solid US job creation data came together with an unexpectedly robust wage growth, signaling that inflation pressures persist.

Meanwhile, the scenario for Bank of England (BoE) policymakers is becoming extremely complicated due to deepening fears of a technical recession in the United Kingdom economy. The UK Office for National Statistics (ONS) reported in its revised Q3 Gross Domestic Product (GDP) estimates that the economy contracted by 0.1%. The UK economy is expected to remain on the back foot as higher interest rates have deepened the cost-of-living crisis, forcing businesses to operate with lower capacity.

Daily digest market movers: Pound Sterling drops sharply despite upbeat Sevices PMI data

The Pound Sterling fell to a near seven-week low of around 1.2600 as the appeal for risk-perceived assets weakened.
The outlook for risk-sensitive assets has worsened as the upbeat United States employment data forced traders to pare Federal Reserve’s rate-cut bets.
January’s US labor market data demonstrated a robust demand for workers and that employers offer higher wage growth to retain employees, indicating that businesses have a strong order book.
As per the CME Group Fedwatch tool, a rate cut in March’s monetary policy meeting is unlikely. For May’s policy meeting, traders see a little above 57% chance for a rate cut by 25 basis points (bps) to 5.00%-5.25%.
The Pound Sterling has come under severe pressure despite the Bank of England seeming more hawkish on the interest rate outlook than the Fed.
Investors hope that a subdued economic performance and increasing geopolitical tensions could force BoE policymakers to cut interest rates earlier than expected.
The United Kingdom’s economy is on the brink of a technical recession. The economy witnessed a GDP contraction of 0.1% in the third quarter of 2023, and a subdued performance is anticipated in the final quarter.
An absence of economic recovery in the UK would significantly impact the labor market.
Out of nine member-led Monetary Policy Committee (MPC), BoE policymaker Swati Dhingra voted for a rate cut by 25 bps in last week’s monetary policy meeting. In contrast, policymakers Catherine Mann and Jonathan Haskel supported a rate hike of similar size.
The UK’s vulnerable economic prospects may force BoE policymakers to join Swati Dhingra and lean towards easing interest rates in upcoming meetings.
The S&P Global has reported an upbeat Composite and Services PMI for January. The Composite PMI improved to 52.9, against expectations and the former reading of 52.5. Services PMI rose to 54.3 from the consensus and the prior release of 53.8.