Pound Struggles Amid BoE Rate Cut Speculations

The British pound reached a five-month low against the euro, though it gained slightly against the weakening U.S. dollar. Economic data revealed disappointing British retail sales, leading to increased speculation about future Bank of England rate cuts. The euro benefited from the pound's struggles as investors focused on monetary policy divergence.

The British pound fell to a five-month low against the euro on Monday, despite making gains against a weakening U.S. dollar. The shift comes in response to recent economic data and statements from a Bank of England official that have prompted investors to bet more heavily on future BoE rate cuts.

British retail sales dropped by 0.3% in December instead of the expected rise, with core consumer price growth also declining sharply. Bank of England rate setter Alan Taylor anticipates the central bank will reduce rates four times in 2025. Currently, markets are factoring in 62 basis points of rate cuts for 2025, up from 40 bps before the recent inflation data was released.

Two weeks ago, concerns about the UK's fiscal situation pressured the pound and bond prices. However, after the latest data, investor attention has reverted to the concept of monetary policy divergence between the Bank of England and other central banks. "This week's labor report and PMI data are essential," noted Enrique Diaz Alvarez, chief financial risk officer. The euro rose to 84.71 pence per euro, approaching its highest mark since late August.

(With inputs from agencies.)