Sterling steadies after upbeat data, still poised for weekly decline

The British pound steadied on Friday but was still headed for a weekly decline against the dollar and euro as weaker-than-expected inflation data offset Friday’s upbeat retail sales, consumer confidence and business activity figures.

While another Bank of England rate cut in 2025 is not a sure thing, this week’s data leaves the door open for the central bank to lower borrowing costs again by the end of the year.

Sterling was little changed against the dollar on Friday at $1.3319, but was set for a weekly decline of 0.9%.

Against the euro, the pound was little changed at 87.17 pence, but was expected to suffer its first weekly decline against the single currency in four weeks.

BEST DATA

Friday’s data painted a slightly brighter picture of the economy heading into the end of the year.

UK retail sales unexpectedly rose in September, driven by technology sales and gold demand from online jewellers, according to official data; Meanwhile UK consumer sentiment improved in October to its highest level since August 2024.

Separately, business activity showed tentative signs of recovery, based on the preliminary UK Composite Purchasing Managers’ Index published by S&P Global on Friday.

“We tend to take the view that consumer confidence and retail sales, both of which were strong today, are to some extent secondary or even tertiary indicators,” said Dominic Bunning, head of G10 FX strategy at Nomura.

“We still expect underperformance (in the pound), in general,” Bunning added, citing recent weak labor market reports and inflation figures.

TO CUT OR NOT?

Investor expectations for a BoE rate cut have fluctuated this week, although markets still see a greater chance of a rate cut this year than the central bank leaving rates unchanged.
Markets earlier this week raised their bets on further BoE easing in 2025 after UK inflation unexpectedly remained steady, coming in below expectations from a Reuters poll of economists and the central bank itself.

Futures markets now imply a 65% chance of a quarter-point BoE rate cut later this year, although that is down slightly from a chance of around 75% before the data was released on Friday.

“The market was already pricing in a greater degree of easing from the central bank after lower-than-expected inflation and rumors of a budget that was more disinflationary than previously expected,” said Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics.

“But the growth picture still shows that neutral interest rates are still high and interest rates are only slightly restrictive.”
Source: Reuters (Reporting by Samuel Indyk; Editing by Toby Chopra)