Sterling recovers against the US Dollar, but slips further versus the Euro..
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| US stocks recovered some lost ground yesterday (amid ongoing US-China tensions), which as always, has a knock-on effect to the currency market.
When there is market uncertainty, the safe-haven currencies like the USD, EUR, JPY & CHF gain in value. When situations improve or are overall just better, traders will move their money away from what is considered 'safe' and into more what is considered 'higher risk, higher reward' currencies and assets like GBP, AUD, NZD, SEK.
As I have reported on many times before, the Pound has oddly tended to follow the performance of the S&P 500 since the covid pandemic began. However, this year hasn't seen much of a similarity between the pair and this is because;
1 - President Trump caused a 'sell the Dollar' trade earlier this year with his global tariffs which prompted the Euro-Zone (in particular Germany) to wake up and spend money on defense and economic growth. The Euro became attractive again and gained both value and momentum amongst traders.
2 - High UK bond yields have severely damaged the Pound's reputation and value. Traders, investors and economists have or are losing faith in the governments handling of its debt and when this happens, uncertainty is the environment and GBP behaves poorly within it.
Fed Chair Powell commented yesterday that the central bank has ample room to cut interest rates without risking stimulating inflation. This is a situation the Bank of England were hoping to be in, but just aren't.
Remember, the US & UK have barely been more that 0.5% apart on interest rates for a long time now.
The Fed are fully expected to cut rates to the same level as the UK this month and likely will keep the 0.25% cutting rate consistent. This means we have 2-3 months before we should see the BoE move.
This puts the UK easily at the highest offering interest rate in the developed world, which does help GBP's value.
With the UK's inflation and interest rates double that of the Euro-Zone, it poses a long-term problem for GBP-EUR rates, whilst still dealing with the current Euro out-performance and high UK bond yields anchoring GBP down problem.
Sterling desperately needs help by Chancellor Reeves next month AND by traders taking profit positions in the Euro's advance in 2025, otherwise we risk seeing the 2020 lows in due course. |
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