Sterling's Resilience Amid Economic Shifts: A Look at 2024

The British pound emerged as the best-performing major currency against the US dollar in 2024, despite facing significant headwinds. Sterling closed the year down just 1.4% against the dollar, a commendable performance given the economic challenges and shifting monetary policies on both sides of the Atlantic. However, this apparent resilience masks a story of volatility, divergence, and evolving market expectations.

Sterling's relative stability was underpinned by narrowing yield divergence between the Bank of England (BoE) and the Federal Reserve (Fed). Throughout 2024, expectations of interest rate alignment reduced the appeal of one currency over the other for yield-seeking investors. The BoE delivered two rate cuts during the year, a move mirrored by the Fed, as both central banks sought to navigate a delicate economic landscape marked by persistent inflation and slowing growth.

Looking ahead, investors anticipate the BoE will cut rates twice more in 2025. This outlook reflects the ongoing challenge of managing inflation, particularly in services and wages, which remains stubbornly high.

Despite its strong annual performance, the pound saw a sharp decline of over 6% against the dollar in Q4 2024. This drop was driven by a resurgent US dollar, bolstered by the Fed’s tougher stance on inflation and stronger-than-expected US economic data. Simultaneously, signs of weakness in the UK economy, including slowing growth and softer consumer spending, weighed heavily on sterling.

While the pound struggled against the dollar, it outshone the euro, gaining approximately 4.5% in 2024. The eurozone faced more pronounced economic challenges, with growth slowing faster than expected. This prompted the European Central Bank (ECB) to pivot aggressively, implementing multiple rate cuts to stimulate the flagging economy.

Sterling’s strength against the euro was most evident in December, when the euro fell to 82.23 pence—its weakest level in two and a half years. This marked a significant milestone, as it approached levels last seen in the aftermath of the Brexit referendum in 2016.

Sterling’s performance in 2024 highlights the complexities of navigating a volatile economic and monetary environment. While its annual decline against the dollar was modest, the pound’s ability to capitalize on eurozone weakness demonstrated its relative resilience.

However, challenges remain on the horizon. The UK economy faces headwinds, and the BoE’s anticipated rate cuts could reduce the pound’s appeal to investors seeking higher yields. On the other hand, the euro’s struggles reflect deeper systemic issues within the eurozone, which may provide some cushion for sterling’s relative strength in 2025.

As markets move into the new year, the interplay of monetary policy, inflation dynamics, and economic growth will continue to shape sterling’s journey. For now, the pound’s mixed performance in 2024 offers valuable insights into the shifting global economic landscape.