The British pound is on track for its largest weekly loss since January, weighed down by disappointing UK economic data and the rising strength of the US dollar, which has been bolstered by investor confidence in U.S. economic policies.
Economic reports released on Friday revealed that the UK economy unexpectedly shrank in September, with growth slowing significantly during the third quarter. The pound remained steady at $1.26795 on Friday, hovering near its lowest level since May. Over the week, it experienced a 2% decline, marking its worst weekly performance in nearly a year.
The strengthening dollar is largely attributed to market expectations surrounding U.S. President-elect Donald Trump’s economic agenda, which includes imposing tariffs on key trading partners, cutting domestic taxes, and rolling back regulations in several industries, including energy and finance. These policies are expected to drive U.S. inflation higher and potentially boost economic growth, further enhancing the dollar’s appeal.
As a result, the pound has lost its previous gains against the dollar this year, declining by 0.4% in 2024. Despite being one of the top-performing major currencies earlier in the year, the pound’s momentum has faltered amid growing concerns about the UK’s economic outlook and the Bank of England’s potential rate cuts.
Money market data indicates that traders now expect the Bank of England to reduce interest rates to around 2% by December 2024, compared to the U.S. Federal Reserve’s projected 3.84%. Analysts suggest that this divergence in monetary policy paths could continue to weigh on the pound.
“If UK economic data remains weak, the Bank of England may shift its focus towards supporting economic growth,” said Roberto Cobo, a strategist at BBVA.
While the pound’s recent performance highlights challenges ahead for the UK economy, the dollar’s dominance may persist as investors respond to the evolving global economic landscape.
