Sterling Edges up in Holiday-Thinned Trading

Sterling Rises in Holiday Trading, Faces Uncertain Future

By Amanda Cooper

LONDON (Reuters) - The British pound strengthened modestly in a holiday-shortened trading session on Tuesday, but could face a more uncertain path next year as global monetary policy diverges, analysts said.

Sterling was last up 0.1% at $1.2544, set for a 1.6% loss in December, marking a third successive monthly loss.

Against the euro the pound was up 0.14% at 82.92 pence per euro. Sterling has gained more than 4% against the euro so far in 2024 and is back to roughly where it was at the time of the Brexit vote in late June 2016.

The winner of 2024 in the currency market has been the U.S. dollar, which has been lifted by ongoing evidence of the resilience of the economy, and by the diminishing scope for the Federal Reserve to cut interest rates much further.

For much of the year, the pound was the only major currency to show a gain versus the dollar, but that has now unwound, leaving sterling down 1.5% so far this year.

Even so, it is still the best-performer among the G10 universe. The runner-up, the Chinese offshore yuan is down 2.5%, while the biggest laggard is the Norwegian crown, which has lost nearly 12% in value.

Part of the pound's appeal has been the prospect of the Bank of England taking longer to lower interest rates than other large central banks, including the Fed.

The imminent return of Donald Trump to the White House, with his electoral pledges to impose tariffs on the major trading partners of the United States, deliver tax cuts and enact mass deportations of migrants, looks set to create a more inflationary environment that would support the dollar.

In Britain, the government's budget that contains billions of pounds in increased taxes, spending and borrowing looks set to drag on economic growth, which could switch things up for sterling, according to City Index market strategist Fiona Cincotta.

"Sterling has been supported across 2024 by the BoE cutting rates at a slower pace than the Federal Reserve and by the expectation that this trend would continue in 2025," she said.

"However, Donald Trump's victory in the U.S. election, combined with the Labour government’s budget, means that the outlook for both economies has changed, potentially impacting the direction of monetary policy in 2025 for both central banks and sterling," she added.

The BoE met last week and kept interest rates unchanged at 4.75%. With the exception of the Norges Bank, the BoE has cut rates less this year than any other major central bank, with just a half-point reduction in borrowing costs, compared with a full percentage point from the Fed and 175 bps from the Bank of Canada.

(Reporting by Amanda Cooper; Editing by Emelia Sithole-Matarise)