Pound sterling slumps to $1.24 in the face of dominant dollar
Pound sterling fell sharply at the start of the year as a combination of weak economic data and divergent bets on the path of interest rates across the Atlantic contributed to a sell-off.
Sterling fell 0.9 against the dollar to trade around $1.24, its lowest position since April 2024.
The currency was hit by an unexpectedly poor PMI reading released on Thursday morning, which showed that the downturn in the UK manufacturing sector had deepened in December.
New business volumes fell to their lowest level since October 2023 while the rate of job losses hit a ten-month high, the survey showed. Many firms pointed to the tax rises announced in the Budget as a key cause of the slowdown.
Sterling’s sell-off was accentuated by data out from the US, which showed a smaller increase in the number of jobless claimants than had been anticipated.
Although tomorrow’s jobs report will provide a much more complete picture, this afternoon’s figures suggest that the US labour market remains resilient and that the Fed can afford to take a gradual approach to cutting interest rates.
This strengthened the dollar and weakened the pound. Domestic currencies tend to be stronger when interest rates are higher, as investors can earn a higher return on their investment.
Sterling was the top performing G10 currency compared to the dollar in 2024, supported by a resilient economy and interest rates remaining higher for longer.
Looking into 2025, however, the outlook is less clear for the pound.
Markets were surprised by the strength of dovish opinion in the Monetary Policy Committee (MPC) at last month’s meeting.
Three members of the nine-strong MPC voted to cut rates again in December, suggesting that policymakers are growing increasingly concerned by the slowdown in UK economic growth.
In contrast the Fed scaled back the number of rate cuts expected in 2025, pencilling in just two cuts across the year. This reflects both the strength of the economy and the potential inflationary impact of Donald Trump’s tariffs.
As a result the dollar index, which measures the greenback against a basket of global currencies, ended 2024 at its highest level in over two years .