Will pound weaken against euro and dollar?

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Pound Expected to Weaken Against Euro and Dollar Amidst Anticipated Bank of England Rate Cuts

The British pound is projected to weaken against both the US dollar and the euro in the near term, influenced by market expectations of imminent interest rate reductions by the Bank of England. As of the reporting period, the pound had already registered a slight decline against the dollar, trading at US$1.2534, and against the euro, at 85.86 pence per euro. This anticipated weakening is occurring despite some recent positive economic indicators, such as the fastest expansion in the construction sector in over a year during April.
Market Pricing for Bank of England Rate Reductions

Financial markets are increasingly pricing in a series of interest rate cuts by the Bank of England within the current year. Current trading indicates expectations for approximately 53 basis points of easing by the end of 2024. This suggests that traders are anticipating at least two quarter-point rate reductions, a sentiment that has solidified following recent inflation data which indicated a slower-than-expected decrease in price growth in March.
Forecasts for Monetary Policy Committee Decisions

Analysts anticipate that the Bank of England will signal its readiness to lower interest rates, potentially as early as June. Danske Bank FX analyst Kirstine Kundby-Nielsen forecasts that two members of the nine-member Monetary Policy Committee will vote in favour of a rate cut at the upcoming policy announcement. This divergence in voting is expected to contribute to the pound's downward pressure.
Impact on Currency Exchange Rates

The expected policy stance from the Bank of England is likely to lead to a depreciation of the British pound. Kundby-Nielsen specifically predicts that such a reaction will drive the euro-sterling exchange rate higher, thereby weakening the pound overall. This outlook is shared by HSBC's global head of FX research, Paul Mackel, who believes that sterling has defied gravity for too long and is now poised for a decline.
Underlying Economic Indicators

While the currency market sentiment points towards a weaker pound, certain domestic economic data offers a more optimistic perspective. British construction firms reported their most significant expansion in over twelve months in April, a sign that economic recovery is becoming more established and widespread, according to EY UK chief economist Peter Arnold. Economists surveyed by Reuters forecast that the UK's Gross Domestic Product (GDP) likely expanded by 0.4 per cent in the first quarter, a rebound from the 0.3 per cent contraction recorded in the final quarter of the previous year.

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Will pound weaken against euro and dollar?

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