Pound surges hoping BOE will hold rates

Bloomberg

The pound rebounded from its new year hangover, on speculation the Bank of England could avoid an imminent cut to interest rates following a post-election economic boost.
Sterling advanced against all major peers and halted its losing streak since the start of 2020, after the UK’s services sector unexpectedly showed signs of strengthening. This may ease pressure on the central bank to loosen monetary policy and stimulate growth, according to Capital Economics Ltd and Pantheon Macroeconomics Ltd.
“Today’s release suggests that there could be a post-election bounce in the data over the next few months as confidence improves,” said Thomas Pugh, UK economist at Capital Economics in London. “If this is confirmed in January and February then it should be enough to convince the bank to keep rates at 0.75%.”
Money markets are pricing in a 6% chance of a rate cut at the Bank of England’s meeting on January 30, down from as much as 85% in October.
The pound has slipped since its best quarter in a decade in late 2019 on optimism the Conservatives would win the December election and avoid an immediate no-deal exit from the European Union. Euphoria following their victory gave way to concerns London won’t seal a trade agreement with Brussels by the time the Brexit transition period expires at the end of 2020, weighing on the currency.
Samuel Tombs, UK economist at Pantheon Macroeconomics in Newcastle, said the latest services data suggested “the lifting of the threats of a no-deal Brexit in January and a business-hostile Labour government has triggered a recovery in activity.” Improving data is significantly weakening the case for the central bank to cut rates over the coming months, he said.