The pound was little changed on the final trading day of the year on Tuesday and is on course to become the best performing currency against the dollar this year as the UK economy held up better than expected.
Sterling fell 1.4% over the year as expectations for UK and US interest rates moved similarly. This has limited divergences between the two countries’ bond yields, which influence currencies by making fixed-income investments more or less attractive.
The pound remained stable at $1.2554 on Tuesday, after starting the year at $1.273.
Investors broadly expect the Bank of England to cut interest rates twice next year, following two cuts in 2024. BoE officials remain concerned that inflation in services and wages remain too high.
“Progress has been made on disinflation, notably through the easing of previous external shocks, although remaining domestic inflationary pressures are resolving more slowly,” the BoE’s monetary policy committee said earlier this month.
However, the British pound was on track to fall by more than 6% in the fourth quarter, as the dollar rallied following the US Fed’s adoption of a tighter inflation stance. , as well as signs of weakness in the British economy.
BoE officials were more divided than expected in voting to hold rates this month, with three favoring a cut.
The British economy contracted in September and October, for the first time since the bird flu pandemic.
The pound has performed much better against the euro, rising around 4.5% this year. The eurozone economy has slowed more than expected, leading the ECB to cut rates relatively sharply and investors to forecast more for next year.
The euro fell to 82.23 pence earlier this month, its lowest level in two and a half years, not far from the levels seen just after the Brexit vote in 2016, which caused the pound to fall.
It last traded at 82.98p, up 0.1% on the day.
