Sterling Stumbles Amid Economic Confidence Woes

Sterling underperformed against the dollar following a report on declining UK business confidence. The British economy showed no growth in the third quarter, and the Bank of England's split decision on interest rates added uncertainty. Traders anticipate rate cuts next year amid a strong dollar rally.

Sterling displayed a lackluster performance against the dollar on Monday, as a survey indicated a drop in domestic UK business confidence. This came against a backdrop of a recent Federal Reserve-induced surge in the greenback's value.

UK business confidence fell to its lowest point of 2024 in December, though employers exhibited slightly more optimism regarding the broader economy, as per a survey released on Monday. Revised GDP figures showed the British economy stagnated in the third quarter, contrasting with an earlier 0.1% growth estimate.

Paul Dales, chief UK economist at Capital Economics, noted, “Our hunch is that 2025 will be a better year for the economy than 2024. However, recent data suggests the economy lacks momentum as the year ends.” On Friday, the pound hit a one-month low of $1.2475, but later rebounded to close 0.5% higher against the dollar after a week rich in central bank activity.

Despite this recovery, sterling struggled to maintain gains on Monday, slipping 0.18% against the dollar at $1.2544. The Bank of England left interest rates unchanged on Thursday, yet the Monetary Policy Committee showed greater division over the decision than expected by markets.

Current trader expectations include around 56 basis points in rate reductions next year, an increase from roughly 45 basis points before the decision. Across the Atlantic, a hawkish Federal Reserve lowered rates as anticipated on Wednesday, yet signaled caution, encouraging a dollar rally. The dollar index finished the week 0.8% higher.

Having been among the top-performing major currencies against the dollar this year, the pound has fallen 1.45% year-to-date. Meanwhile, the euro slightly weakened against the pound on Monday, trading at 82.90 pence.

European Central Bank President Christine Lagarde stated that the eurozone was nearing the ECB's medium-term inflation target, according to an interview in the Financial Times. With a holiday-shortened week, trading volumes are expected to dwindle as markets brace for the upcoming year.

(With inputs from agencies.)