Risk-Sensitive Pound Sterling Sees Buyers Flee

August 7, 2024 - Written by David Woodsmith

STORY LINK Risk-Sensitive Pound Sterling Sees Buyers Flee

After heavy selling pressure on Monday, risk appetite has attempted to stabilise, but confidence remains very fragile and there has been notable selling interest on rallies for European equities.

Similarly, risk-sensitive currencies including the Pound have not been able to sustain bounces.

The Pound to Dollar (GBP/USD) exchange rate failed to hold 1.2800 and retreated to 1.2730, not far above 1-month lows.

The Pound will remain very sensitive to risk conditions with potential gains if conditions improve.

The dollar will also tend to lose ground if the economy weakens and there are cuts in interest rates.

The US currency will, however, tend to strengthen if fears surrounding the US and global economy intensify while fear would trigger renewed Pound losses.

GBP/USD will be vulnerable to further selling if it dips below 1.2700.

According to MUFG; “any USD weakness on the back of lower US yields could prove to be short-lived if fears over a harder landing for the US/global economy begin to encourage a bigger pick-up in safe haven flows into the US.”

ING commented on the short-term outlook; “We are not equity strategists, but risk assets are looking at the potential risk of the Fed underdelivering in terms of dovish communication. We also have the US CPI report next week, and any upside surprise can definitely ignite more risk-off as hopes of large cuts have to be scaled back.”

The latest US data provided some reassurance that the economy was not sliding into recession which helped support market sentiment.

The ISM business confidence index recovered to 51.4 for July from 48.8 previously and just above consensus forecasts of 51.1.

Markets continued to debate the US interest rate outlook.

San Francisco Fed President Daly stated that minds are open to cutting interest rates in coming meetings and the risk to the Fed’s mandates is getting more in balance.

Markets still expect that the Fed will cut interest rates by 50 basis points at the next policy meeting, but do not now expect a 75 basis-point cut.

On a medium-term view, ING commented; “once stock markets ultimately stabilise – and barring an inflation surprise next week – the dollar should head lower, in our view.”

Domestically, the British Retail Consortium (BRC) reported a 0.3% annual increase in like-for-like retail sales for July after a 0.5% decline previously and in line with consensus forecasts.

Barclays reported a 0.3% annual decline in consumer spending for July.

According to Barclays; “the bigger picture was one of a recovery in spending power and consumer confidence. This, coupled with the fact that the Bank of England has begun to reduce interest rates, should translate into stronger underlying spending growth, as we move through the second half of this year and into 2025."

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TAGS: Pound Dollar Forecasts