Pound at risk as BOE holds while Fed, ECB near hikes — SkimNews
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- British pound gained 1.6% against the euro, 4.9% versus the Swedish krona, and outperformed most G10 peers in 2023 despite political turnover and geopolitical shocks
- Bank of England held its key interest rate at 3.75% throughout the year, with market pricing showing low odds of a hike at its September meeting
- European Central Bank and Federal Reserve are both seen as likely to raise rates in coming weeks, creating divergent monetary policy paths that typically strengthen those central banks' respective currencies
- Keir Starmer's resignation on July 20 triggered a leadership change, but markets viewed the transition to Andy Burnham as orderly, reducing immediate political risk for sterling
- John Healey, the new U.K. finance minister, pledged fiscal discipline in a Monday speech, though analysts expect the October 28 budget to include higher ancillary taxes and increased debt issuance
- Matthew Ryan of Ebury noted the upcoming budget carries high political risk and could spook markets if it includes growth-dampening tax changes or expansive borrowing to fund spending ambitions
Why it matters: Sterling’s recent strength hinges on resilient growth and reduced political risk, but with the BOE staying put while the ECB and Fed move toward hikes, the pound loses yield appeal. The October 28 budget could force a reassessment if tax increases or higher borrowing signal fiscal loosening amid elevated debt costs, directly impacting investor confidence and currency stability.
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