Expectations are growing that policymakers in both the US and UK will cut rates this month
Latest insights:
The pound’s minor post-budget boost continued last week as it strengthened against the dollar to levels last seen in October. The Chancellor’s tax and spend balancing act seems to be working as far as money markets are concerned, with investors expressing muted confidence in the UK’s fiscal management. But lower growth prospects may work against sterling in the longer term.
The euro also had a good week after a eurozone PMI survey (a measure of economic health based on surveys of business leaders) showed a leap in private sector activity. The euro is benefitting from inflation rates that are near to target, and the euro dollar exchange rate is now up over 10.1% over the last year.
Rate cuts on both sides of the Atlantic?
Investors overwhelmingly expect the US Federal Reserve (Fed) to cut interest by 25bps next week in an attempt to boost economic activity and, in particular, a cooling labour market.
The Bank of England (BoE) is much more divided ahead of its 18 December meeting, though a modest rate cut seems the most likely outcome. Markets are currently predicting at least two further cuts from both sets of policymakers in the first half of 2026.
The European Central Bank (ECB) is more advanced in its easing cycle and may not cut rates again for the foreseeable future.
The week ahead:
The big focus in the week ahead is the Fed’s final monetary policy meeting of 2025, with the decision on interest rates coming on Wednesday. The decision is likely to impact exchange rates as money market investors look for the best returns.
Elsewhere, important GDP and industrial production (Friday) figures will be released in the UK this week, with both forecast to show a slight rise. In the eurozone, focus will be on German industrial production (Monday) and inflation figures in Germany and France (Friday).
