Sterling Soars to Two-Year High Amid Diverging Rate Outlook

Sterling Soars Against the Dollar

Sterling rose to its highest level against the dollar since March 2022 on Tuesday as investors anticipate a shift in monetary policy.The pound gained as much as 0.4% against the greenback, hitting $1.3246. Traders are reacting to contrasting signals from U.S. and U.K. central bankers regarding interest rates.

Contrasting Central Bank Signals

• Federal Reserve Chair Jay Powell indicated that "the time has come" for U.S. rate cuts.
• Bank of England Governor Andrew Bailey adopted a more cautious approach, stating it is "too early to declare victory over inflation."

The contrasting viewpoints were highlighted during a summit of central bankers in the U.S. last week, reflecting the potential paths for monetary policy in both nations.

Investor Sentiment and Forecasts

The widening gap in expectations suggests that investors are projecting potential interest rate cuts by the Federal Reserve, forecasting seven or eight quarter-point reductions by year-end. However, uncertainty looms over the timing and magnitude of these cuts, with traders divided about whether the first cut next month will be 0.25% or 0.50%.

The Bank of England's recent cut was its first in more than four years, sparking speculation on future moves, with forecasts suggesting only four additional cuts by mid-next year.