Sterling edges closer to $1.25 as traders expect BoE to cut more than Fed 

On Tuesday, the British pound edged closer to $1.25, a level not seen since December, as traders increased bets that the Bank of England will deliver more interest rate cuts than the Federal Reserve this year. 

Sterling declined by 0.1% to $1.2540 in trading on Tuesday, matching a six-week low reached on Monday following data revealing an unexpected expansion in U.S. manufacturing activity in March — the first since September 2022. 

This marked a significant turnaround for the currency, which reached as high as $1.2894 in early March before facing downward pressure after two of the Bank of England's most hawkish members dropped their calls for interest rate hikes at the central bank's latest policy meeting. 

At the time of writing — 12:25 GMT on April 2 — GBP/USD had recouped earlier losses to trade around $1.2565, indicating gains of 0.11% for sterling against the greenback.  

The growth followed a data release on Tuesday which showed that British manufacturers reported their first overall growth in activity in 20 months in March thanks to recovering domestic demand. Separate figures showed that UK banks granted the largest number of mortgages in February since September 2022 — a period marked by diminished lending following bond market turmoil caused by Liz Truss' premiership. 

The U.S. dollar index (DXY) was down 0.09% at 104.93 after touching a 5-month high earlier in the session. 

More data on strength of U.S. economy could boost USD, pressure sterling 

Erik Nelson, a macro strategist at Wells Fargo, told Bloomberg that further indications of robust performance in the U.S. economy could propel the dollar higher in the near term — and put more pressure on sterling.  

In a comment to the publication on Tuesday, Nelson said: 

“There is some risk that we could see a break of $1.25, but it really hinges on seeing further strong US data, not just OK data”. 

He added that a “clearer, hawkish pivot” from Fed policymakers could lead to a decisive break lower in the pair. 

Markets pricing in 65 bps of cuts by Fed, 70 bps by Bank of England 

Currently, money markets are pricing in 65 basis points of rate cuts in the U.S. this year, compared to 70 basis points in the UK, as per data cited by Bloomberg’s Vassilis Karamanis. The likelihood of a quarter-point interest rate cut by the Bank of England in June stands at approximately 63%, while that of a similar move by the Federal Reserve briefly dipped below 50% on Monday. 

In options trading, traders seeking to hedge against a weakened British pound must pay a sizable premium across tenors. Market sentiment towards the currency's performance this week is at close to the most bearish level since late October. 

Karamanis also noted that technical signs are suggesting that sterling may break out of the $1.25-$1.28 range it has maintained for much of the year. The widely monitored weekly Bollinger Width indicator has dropped to levels not seen since 1977, indicating a high likelihood of a big movement for the pound against the dollar — in either direction. 

GBP forecast: Scotiabank says sterling regaining 1.26 should trigger “additional strength” 

In a comment released on April 2, Shaun Osborne, chief currency strategist at Toronto-based Scotiabank, wrote that the GBP to USD pair — widely known as “cable” in foreign exchange markets — could rise further if it regained its footing around the 1.26 mark: 

“Spot weakness through the upper 1.2500 area on Monday – where Cable had found support over the past week – extended a little but the low 1.2500 area (the base of the range for the GBP since late last year) continues to draw interest from bargain hunting buyers.  

Intraday price action looks mildly positive for the GBP (a bullish outside range signal developed through Asian/European trade). 

Resistance is 1.2585/1.2590; if Sterling can regain a 1.2600 handle, additional strength should follow”.