The Pound Slides as Dollar Strengthens, but Remains Higher than Last Year
The value of the pound has fallen for the fifth consecutive day against the dollar, although it is still 18% higher than a year ago when Liz Truss’ borrowing plans as Prime Minister caused it to reach a record low. Traders speculate that the Bank of England (BoE) has likely concluded its campaign of raising interest rates after leaving monetary policy unchanged last week due to the slowing economy and decreasing inflation.
Sterling has been steadily declining since July when it reached a 15-month high. This is due to macroeconomic data and central banks’ statements suggesting that interest rates in the United States are more likely to rise than in the UK.
Boosted by 10-year US Treasury yields reaching their highest level since 2007, the dollar is set to experience a 2.4% rise in September. The Federal Reserve’s recent indication that rates will remain higher for longer has further supported the dollar’s strength.
As of now, the pound stands at $1.2174, its lowest since March, and is set for its largest monthly loss since September 2020, when it hit a record low of $1.0327 due to unfunded tax cuts outlined in the Truss government’s “mini budget.”
RBC Europe’s chief currency strategist, Adam Cole, suggests that the pound’s performance against the euro provides a more accurate reflection of investor sentiment towards the currency. He notes that sterling had been supported by expectations of additional BoE rate hikes, but these expectations have diminished following last week’s events. The cooler inflation reading in August, weak British business activity in early September, and the BoE’s decision to maintain interest rates have collectively contributed to a 1.1% decrease in the pound’s value.
Cole predicts that if the half rate hike currently priced in were to unwind, the pound may face further underperformance. His team has set a year-end target of 89 pence for the euro/sterling exchange rate, implying a potential 2.4% drop for the pound from its current value of 86.95 pence.
Due to the erosion of its yield advantage, the pound’s value has remained virtually unchanged this year after recording an 8% gain in July. It had previously been the best-performing G10 currency against the dollar in 2023.
Nomura strategists recently revised their sterling target to $1.18, citing the US monetary policy outlook as the primary reason for the projected strength of the dollar. They also highlighted several UK-specific factors that do not support the pound, including capital outflows from British stocks and bonds, an excess of bullish speculative positions, and unexpected British data readings.
More detail via Reuters here… ( Image via Reuters )