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Pound Holds Steady After Volatile Week Dominated by Safe-Haven Flows and Shift in Interest Rate Expectations

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The pound has stabilized after a volatile week marked by safe-haven flows due to violence in Israel and a sudden shift in interest rate expectations. Sterling is now approaching three-week highs against the dollar and the euro, reflecting investors’ reassessment of U.S. interest rates and euro zone growth prospects rather than any UK-specific factors.

At present, the pound is unchanged at $1.2283 against the dollar and down 0.1% against the euro at 86.40. This provides some relief for sterling traders, who have experienced significant price swings earlier in the week. However, volatility for sterling options expiring in one month’s time spiked to its highest level since July on Tuesday, indicating the uncertain outlook for the currency.

Many investors have turned bearish on the pound for the first time since April, despite having recently held their largest bullish position in sterling since 2014. Manish Jaradi, a DailyFX strategist, suggests that a slowing UK economy, particularly in comparison to the robust U.S. economy, has negatively impacted the pound. However, any signs of improvement in UK growth could prompt a reassessment of speculative positioning.

Further signs of a slowdown in the UK economy have emerged as well. The Recruitment and Employment Confederation (REC) reported that British employers reduced job vacancies for the first time in more than two and a half years in September, indicating a cooling labor market. This could have implications for the Bank of England’s decision on interest rate increases to combat inflation pressures. The International Monetary Fund (IMF) forecasts that the UK will have the slowest-growing economy among the Group of Seven nations next year and inflation remains above 6%.

Thursday’s release of gross domestic product (GDP) data is expected to show that the UK economy grew by 0.2% in August, following a surprise contraction of 0.5% in July. Year-on-year, the forecast is for 0.5% growth in August, compared to no growth in July.

Expectations for UK interest rates are currently evenly split, with a 50/50 chance of another rate hike by the Bank of England.

Overall, the pound’s recent volatility is reflective of both global factors, such as U.S. interest rate expectations, and concerns over the UK’s economic performance. Investors will be closely watching upcoming economic data releases and Bank of England meetings for more clarity on the pound’s future direction.

Sources:
– Reuters
– The Recruitment and Employment Confederation
– International Monetary Fund

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