Widening interest rate gap gives the pound wings

After a few chaotic years, the United Kingdom is ready to renew its trade ties with Europe. Dutch export companies may still be able to gain a currency advantage.

The sharp rise in the exchange rate in recent weeks has made it tempting to declare 2024 the year of the dollar. Since the US presidential election, the currency has risen by 5% against the euro. It could even be that the euro and the dollar will be worth the same again, just like in 2022. The pound’s exchange rate antics have been less spectacular recently, but this currency has actually risen a bit more than the dollar this year. This is partly due to a changing of the guard in the House of Commons. Since the elections on 4 July, the Labour Party has had a majority there for the first time in fourteen years.

Reverse Brexit?
In the meantime, the Brexit referendum took place under the leadership of the Conservative Party and the United Kingdom left the European Union after chaotic negotiations. That move will not be reversed for the time being. But the Labour government is seeking greater rapprochement with the European Union. Yesterday, Rachel Reeves, as the British Chancellor of the Exchequer, gave her first speech to her colleagues from the eurozone since 2020. She stressed that after a period of division and chaos, it is now time to strengthen the ties between the United Kingdom and the European mainland in terms of trade.

Take care
In addition to a normalization of trade policy, the pound is also benefiting from a growing interest rate advantage. The European Central Bank (ECB) is expected to lower the policy rate by a quarter of a percent to 3,0% on Thursday. Economists are already expecting this rate to fall in four steps to 2,0% next year. In this way, the ECB wants to stimulate the very low economic growth. On the other hand, the Bank of England (BoE) is paying more attention to inflation, which was just above the official target in October.

Nice 2025 for the pound
There is therefore a good chance that the other side will pause during the BoE meeting on 19 December. The British policy rate is currently still at 4,75%. This rate is estimated to fall by two or at most three notches in 2025. The prospect that the interest rate differential with the European mainland will only increase makes it attractive for parties to hold their assets in pounds instead of euros. After a strong 2024, the pound could possibly prepare for a further rise in the new year. That is good news for the Dutch export sector, but a disappointment for anyone who wants to go out in London soon.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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