By Stefano Rebaudo
(Reuters) -Sterling snapped a four-day rising streak as data on Tuesday showed British unemployment rose, while annual wage growth slowed slightly, bolstering expectations for a Bank of England interest rate cut next month.
Yields on 2-year gilts, more sensitive to expectations for BoE policy rates, dropped 6 bps to 3.74%, within a whisker of their lowest since August 2024.
Appetite for risky assets, which usually supports the British currency, was mixed with European shares rising to a two-week high while U.S. stock futures dropped 0.20% after the S&P 500 jumped 1.5% the day before.
Sterling fell 0.33% to $1.3135, after hitting the day before $1.31914, the highest level since October 29.
The U.S. dollar rose against the safe-haven yen and versus the growth-sensitive Australian dollar on Tuesday as investors shifted their focus to data expected once the U.S. government shutdown ends.
However, the main focus for sterling traders remained the BoE rate outlook.
“Markets still underestimate the depth of the Bank’s potential easing cycle,” said Modupe Adegbembo, an economist at Jefferies.
She mentioned traders pricing 21 bps of BoE rate cuts for December, up from 17 bps before the jobs data, and 65 bps of easing by December 2026 versus 58 bps before.
“Given the weakness in the labour market and the additional fiscal tightening likely to be delivered by the Chancellor, we expect the BoE to bring (the) Bank Rate down to around 3% (which now stands at 4%),” she added.
BoE policymaker Megan Greene said she was concerned about surveys showing a relatively high level of pay settlements planned for next year.
The euro jumped 0.45% to 88.10 pence after a four-day falling streak. It reached 88.30 last week, its highest level since May 2023.
While markets anticipate further BoE rate cuts, the euro remains supported by a firmly anchored outlook for European Central Bank policy, with its key rate expected to stay unchanged through 2027.
“Weak UK growth fiscal difficulties and the current low popularity ratings of both (finance minister Rachel) Reeves and prime minister (Keir) Starmer also hint at political headwinds ahead,” said Jane Foley, senior forex strategist at Rabobank.
She expects the euro to continue edging higher into next year versus the British currency.
(Reporting by Stefano Rebaudo; editing by Alexander Smith)
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