The pound is heading towards stability today against the US dollar, near the 1.3182 level. While it tends to decline against the euro for the third day in a row, declining by 0.06%.
The pound’s movements today follow an unexpected surge in Halifax House Price Index which posted the fastest annual growth in over a year and a half. This date, from a sector typically known for its weakness, may provide the Bank of England with greater confidence in maintaining its relatively gradual approach to rate cuts.
The HPI recorded a growth of 4.3% on an annual basis, which is the fastest growth rate since November 2022. On a monthly basis, house prices increased by 0.3%. Both readings came better than expected.
These figures add to the positive signs for the UK construction sector that we got from the August construction PMI. While the expansion of construction activity overall was a little slower than expected, the S&P Global report said that companies in the sector are recording a sustainable recovery. This was largely due to strong growth in new orders and residential activity growing at the fastest pace since September 2022. The survey also indicated that improving economic conditions and political stability have boosted customer demand.
On the other hand, the dollar continues to weaken this week in light of the labor market data that we have seen from the US, which has given further impetus to the hypothesis of multiple interest rate cuts this year. In contrast, the Bank of England is likely to be one of the slowest central banks in advanced economies to cut rates.
There is a 35% chance that the December meeting will end with the Fed achieving a cut of up to 1.25 percentage points, according to the CME FedWatch Tool. There is a 41% chance of a 0.5 basis point cut at the next meeting in two weeks, while a 25-basis point cut remains the most likely scenario so far at 59%. On the other side, there is no expectation of a cut by the Bank of England this month.
This narrative has led to a further narrowing of the gap between US and UK gilt yields to tilt in favour of the latter, which should provide further boost for the pound to continue its gains. The gap between the 10-year Treasury and the same-term British government bond is -0.211, which represents the lowest level since September 2023.
While worse-than-expected US labor market figures today could widen this gap in favour of UK bonds, which could boost the pound’s gains.
