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Worsening global risk sentiment knocks sterling
Global Banking & Finance Review®
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By Joice Alves
LONDON (Reuters) – Sterling fell on Monday as weak Chinese economic data added pressure on risky currencies, while investors scaled down their expectations for Bank of England interest rate rises this year.
Risk-sensitive sterling has fallen 10% against the dollar this year as the war in Ukraine, rising inflation, poor domestic economic growth and fears for a slowdown in the global economy have hit risk sentiment.
Lastly, poor Chinese economic data on Monday amid COVID-19 lockdowns, led to falls in assets considered riskier, including sterling and European stocks while helping the safe-haven U.S. dollar consolidate gains near a two-decade peak.[.EU]
“Sterling’s short-term outlook remains strictly tied to developments in global risk sentiment,” said Francesco Pesole, FX strategist at ING.
“Unless we see a recovery in risk appetite this week, the risk of another drop in cable to the $1.2000 mark remains quite high,” he added.
In a choppy start to the day, sterling fell 0.2% against the dollar to trade at $1.2236 at 0900 GMT, and was not too far from a two-year low of $1.2156 touched on Friday.
It also fell versus the euro, down 0.4% to 85.25 pence towards a seven-month low of 86.18 pence hit last week.
Money markets were pricing in around 133 basis points (bps) of Bank of England rate hikes by year-end, from 144 bps in April. [IRPR]
Expectations for rising interest rates tend to boost the value of a currency, but with markets turning their focus to recession risks in Britain, they are reassessing their view on how they expect the BoE to act in an effort to tame rising inflation.
“Previously a huge proportion of rate hikes had been priced into the market, (and) this outlook is now being re-assessed,” said Jane Foley, head of FX at Rabobank London.
(Reporting by Joice Alves; Editing by Bradley Perrett)
Sterling is the official currency of the United Kingdom, often referred to as the British pound. It is used for all transactions and is represented by the symbol £.
Interest rates are the percentage charged on borrowed money or paid on savings. They influence economic activity by affecting consumer spending and investment.
Foreign exchange, or forex, is the market where currencies are traded. It is the largest financial market in the world, facilitating international trade and investment.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. Central banks attempt to limit inflation to maintain economic stability.
Risk sentiment refers to the overall attitude of investors towards risk in the financial markets. It can influence asset prices and investment decisions.
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