What is going on here?
The pound fell against the dollar but hit a two-year high against the euro, reflecting diverging economic cycles between the UK and the eurozone.
What does this mean?
The British pound fell 0.2% to $1.3298, slightly below last week’s two-year high against the dollar. It did, however, strengthen against the euro, with the EUR/GBP rate down 0.3% to 83.59 pence, its lowest since August 2022. The divergence is supported by contrasting business activity indicators. The UK PMI fell to 52.9 in September, below expectations although still indicating growth. Meanwhile, the Eurozone PMI fell to 48.9, indicating contraction. Notable declines were seen in Germany and France, Europe’s largest economies. As a result, both the Bank of England (BoE) and the European Central Bank (ECB) are expected to make further interest rate cuts, although signs of a recovery in the UK economy may lead the BoE to proceed more cautiously.
Why should you care?
For markets: Navigating the seas of uncertainty.
The recent move highlights the pound’s resilience against the volatile dollar and euro. With the Bank of England expected to make cautious rate cuts and the European Central Bank leaning toward more aggressive easing, investors should focus on sectors that will benefit from stable monetary policy. UK companies, especially the services sector, are likely to perform well.
The big picture: Global economic change is on the way.
The current economic divergence is indicative of a broader global trend where monetary policy is increasingly tailored to national circumstances. UK Chancellor of the Exchequer Rachel Reeves has pledged to pursue long-term growth without harsh austerity measures, taking a unique fiscal approach amid global tightening. With budgets due for release on October 30, the UK’s strategy will provide further clarity on the path of the economy as other major economies navigate their own challenges.
