Sterling drops against firmer dollar

Sterling was 0.2 per cent lower against the dollar at $1.26865

Sterling dropped against a broadly firmer dollar on Monday, as traders mulled what the BoE might signal at its next policy meeting amid growing confidence that the Fed will soon be cutting interest rates.

At 1156 GMT, sterling was 0.2 per cent lower against the dollar at $1.26865. With little market-moving news out of the UK, traders remain focused on key monthly U.S. jobs data release this week for direction.

On Monday, most currency pairs were trading in line with their relative sensitivity to dollar moves, said Nicholas Rees, FX market analyst at Monex.

With a limited UK data calendar, the key for sterling is going to be how markets view the divergence in central bank easing expectations between the BoE and other developed market central banks, he added.

Market attention has shifted in recent weeks to when the Bank of England will begin rate cuts. The bank rate is presently at a 15-year high of 5.25 per cent, but with inflation beginning to drop and the economy slowing, traders think rates have probably peaked.

The Bank of England will make its next policy announcement on December 14, with markets almost unanimously speculating on no change.

Nonetheless, BoE Governor Andrew Bailey last week said the central bank "will do what it takes" to get inflation down to its 2 per cent target, adding that he had not yet seen enough progress towards that goal to be confident.

In spite of Monday's retreat, the pound stays near its highest level in nearly three months, led in part by the diverging expectations for the Federal Reserve and the Bank of England.

Futures markets show the Federal Reserve could deliver nearly 130 bps' worth of cuts in 2024, while the BoE is expected to cut by only 75 basis points.