Pound Sterling Struggles as Risk Appetite Dips Again, Pound to Dollar Rate Falls

August 11, 2024 - Written by Frank Davies

STORY LINK Pound Sterling Struggles as Risk Appetite Dips Again, Pound to Dollar Rate Falls

Equity markets rallied during Wednesday and risk appetite improved, but there was a fresh setback late in the New York session.

US equities surrendered gains to post significant losses and confidence remained very fragile on Thursday.

The fresh reversal in confidence put downward pressure on Sterling with the Pound to Dollar (GBP/USD) exchange rate dipping just below 1.2700 and close to 1-month lows.

MUFG commented; “The recent price action is consistent with risk-off trading conditions that has meant high beta G10 currencies have weakened against the US dollar even as market expectations for more aggressive Fed rate cut expectations have intensified.”

GBP/USD will need more positive risk conditions to make significant headway.

The US economy will remain a key focus in the short term with data releases watched closely given recession fears.

ING commented; “At the heart of the investment story is the issue of whether the US economy is going into recession – and if so, what the Federal Reserve is going to do about it.”

According to the bank; “A recession without a Fed response (were the Fed to be trapped by sticky inflation) could mean a flatter/inverted yield curve, heavy equity losses and a stronger dollar.”

It points to an alternative scenario; “Softer US data and a Fed response – perhaps signalled at the Jackson Hole symposium in two weeks – would deliver a steeper yield curve, more stability/recovery in risk assets and a broadly weaker dollar. We are more in the latter camp here and think that the dollar can soften more broadly over the next couple of months.”

At this stage, markets are pricing in just over a 70% chance of a 50 basis-point rate cut at the September policy meeting.

Vasu Menon, managing director of investment strategy at OCBC commented; "Investors need to brace for a bumpy ride there is a lot of economic data on tap between now and then which could change the odds".

Although domestic data releases are having limited impact at this stage, they will be important for the Pound if risk conditions stabilise.

The latest RICS survey recorded a small decline in the housing index to -19% for July from -17% the previous month and below consensus forecasts of -12%.

There were, however, more positive sub-components with a stronger reading for new buyer enquiries while sales expectations posted the strongest reading since January 2020.

There are also expectations that prices will increase over the next few months.

RICS Chief Economist, Simon Rubinsohn, commented; “The new government’s focus on boosting housing development alongside the recent quarter point base rate cut does appear to have shifted the mood music in the sales market.”

He added; “It is far from clear that the Bank of England will follow the August move with further easing over the coming months, but, even so, the policy mix is becoming more supportive for the sector.

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TAGS: Pound Dollar Forecasts