Sterling Slips Against Dollar, Hits New High Versus Euro Amid Diverging Economic Cycles

Sterling dipped against the dollar but reached a new two-year high against the euro, as business activity readings highlighted diverging economic cycles between the UK and eurozone. The UK's PMI fell to 52.9 in September, while the eurozone's PMI declined to 48.9. Market expectations suggest further rate cuts from both the ECB and BoE.

Sterling dipped against the dollar on Monday, but hit a new two-year high versus the euro as business activity readings pointed to differing economic cycles in the British and eurozone economies. The pound slipped 0.2% to $1.3298, hovering below a two-year high reached against the dollar on Friday.

A survey showed that British businesses experienced a slowdown in growth this month, as well as waning price pressures, possibly prompting the Bank of England (BoE) to consider further rate cuts. The UK S&P Global Composite Purchasing Managers' Index (PMI) fell to 52.9 in September, below economists' forecast of 53.5 yet above the 50 level that indicates growth.

Conversely, sterling gained ground against the euro. The euro/sterling slid 0.3% to 83.59 pence, its weakest since August 2022. A similar survey showed the euro zone PMI dropped to 48.9 from August's 51.0, with Germany's decline worsening and France returning to contraction after an August boost from the Olympics.

Market pricing shows traders betting on 44 bps more in rate cuts from the ECB by year-end and 40 bps of easing from the BoE. The ECB has reduced rates twice this year; the BoE just once. Last week, the BoE kept rates at 5.0%, citing a cautious approach to future cuts due to economic resilience and stable service sector prices, reducing the need for aggressive monetary policy easing.

FX strategists at Deutsche Bank noted that over the past two years, no G10 economy has outperformed expectations as much as the UK, with the currency benefiting from high real rates. British finance minister Rachel Reeves vowed no return to austerity, promising long-term growth despite fiscal challenges. She hinted at possible tax increases to address a reported £22 billion ($29 billion) deficit in public finances during her first budget on Oct. 30.

(With inputs from agencies.)