Sterling Dips as Investors Eye Diverging Monetary Policies

Sterling dipped against the dollar after reaching two-year highs, while gaining ground versus the euro. Investors are focused on diverging monetary policies between the U.S. and Britain. The Bank of England cut rates by 25 bps in August, and more cuts are expected, while the Federal Reserve may also reduce rates.

Sterling dipped from two-year highs against the dollar but made further gains versus the euro on Wednesday as investors focused on diverging monetary policies between the United States and Britain. The pound slipped 0.3% to $1.3218, following its peak at $1.3269 on Tuesday, marking a strong performance in August.

Soft U.S. economic data and Federal Reserve Chair Jerome Powell's comments last week have fueled expectations for a series of interest rate cuts, weakening the dollar against many currencies. The pound also benefited from improving domestic economic data and Bank of England Governor Andrew Bailey's cautious stance on further rate cuts.

The Bank of England cut its main interest rate by 25 basis points to 5% in early August, with additional cuts expected by the end of the year. In contrast, the Federal Reserve is anticipated to cut rates by 103 basis points over three meetings this year, with speculation about a significant 50 basis points cut next month.

Meanwhile, Prime Minister Keir Starmer warned of a prolonged period of rebuilding Britain, criticizing the previous Conservative government. Markets are focusing on diverging monetary policies, but mild fiscal consolidation in the UK versus ongoing fiscal laxity in the U.S. might lead to less divergence in monetary policy than currently anticipated.

Against the euro, the pound rose for a sixth consecutive session, trading at a one-month high. Euro/sterling was last down 0.2% at 84.18 pence per euro.

(With inputs from agencies.)