Pound set for worst week of 2024 as UK interest rate bets shift

Sterling is on track for its worst week of the year, impacted by shifting bets on interest rates and the fallout from escalating geopolitical tensions in the Middle East. Over the last five days, the pound has depreciated 1.9 per cent against the dollar, trading around $1.311 on Friday afternoon, a drop from just over $1.34 at the beginning of the week, as reported by City AM.

This decline has disrupted sterling's impressive start to the year, during which it outperformed all other major currencies. "This week's plunge has certainly upset sterling's strong bull run since April," commented David Morrison, senior market analyst at Trade Nation.

Earlier this week, sterling was pressured due to Middle East tensions, driving investors towards safe haven assets like the dollar. Kathleen Brooks, research director at XTB, observed that the dollar "caught a bid" as geopolitical risks escalated.

"The currencies that were most extended vs. the USD have sold off rapidly, as investors have sought the safety of the USD," she stated. Sterling's sell-off gained momentum yesterday after Governor Andrew Bailey hinted that the Bank of England could be "bit more aggressive" in reducing interest rates if inflation continued to moderate.

The Governor's remarks were perceived as slightly more dovish than his previous guidance had suggested, leading markets to expect further rate cuts in the coming months.

Lower interest rates typically result in a weaker domestic currency as international investors seek higher returns elsewhere. The pound experienced a brief recovery this morning following comments from Huw Pill, the Bank's chief economist, who expressed "ample reason for caution" regarding interest rates.

However, this recovery was short-lived.

This afternoon's US jobs figures exceeded expectations, prompting markets to reconsider potential reductions in US interest rates. The data revealed that the US economy added 254,000 jobs in September, significantly surpassing economists' predictions of 150,000 and marking a substantial increase from last month's figure of 159,000.