Published: August 7th, 2024
The British Pound is experiencing an extended selloff against a backdrop of sinking global stock markets and worries that the US economy is faltering.
The Pound to Euro rate dropped 0.60 per cent on Friday 2nd August after the Bank of England (BoE) cut interest rates by 25 basis points. Then on Monday 5th August, US equities markets fell after earnings from big technology companies came in well below expectation.
A research note from Capital Economics said the confluence of those factors created additional selling pressures in the Asian session, when Japan’s Nikkei 225 index fell by more than over five per cent. ‘In our view, such a steep and sudden decline points to a wider bout of global risk aversion.’
Risk-averse sentiment can negatively impact Sterling, which was already feeling the pressure after Threadneedle Street policymakers made their rate cut. The Pound to Euro conversion fell below 1.18 on Tuesday 6th August to touch 1.1773, a level last seen on 2nd July.
Historically, GBP tends to lose value against USD, EUR, CHF and Yen when market sentiment turns gloomy. It can also gain against 'high beta' currencies like the Norwegian Krone and the Australian and New Zealand dollars.
‘Stock markets fell globally last Friday as fear trading took over in advance of the crucial US job print,’ wrote Capital Economics’ analysts. ‘Many sectors are experiencing a selloff, with tech firms suffering worst after investors punished Intel, Amazon, Apple and others for poor earnings.’
In April, The GBP/EUR exchange rate moved to the 1.17 threshold following publication of GDP figures showing Britian’s UK economy grew 0.1 per cent month-on-month in February 2024, while an upward revision to January's figure (from 0.2. per cent to 0.3 per cent) added to the good news.
The combined numbers from the Office of National Statistics (ONS) effectively guarantee that the quarterly figure will indicate a return to growth, ending the low-level recession seen in the second half of 2023. A Q1 contraction would mean that UK GDP declined by a full percentage point in March, something economists see as highly unlikely.
Sterling was up against most of its peers on Tuesday, 16th April, though the Pound to Dollar rate struggled to get beyond 1.2537 thanks to a broader Greenback rally driven by the release of strong US inflation and labor market prints.
Production output drove the majority of UK growth in February, expanding by 1.1 per cent. The UK’s large services sector grew by 0.1 per cent in February and by 0.3 per cent in January.
Analysts say any upside potential from the GDP figures could be hemmed in by the relatively small advance in the figures, which aren’t big enough to significantly stimulate inflation.
An analyst note from Barclays Currency Strategy Unit said 'we would need to see a series of exceptional GDP prints to indicate that the UK economy is robust enough to kindle an upside inflation surprise similar to what we’ve seen in America recently.’
Sterling started the second week of March 2024 softer following publication of a UK job market survey by global consultancy KPMG that confirmed a previous slowdown in wage increases had become bedded-in.
The survey revealed that the rate of salary inflation for permanent job placements had sunk to a three-year low. An index of permanent staff salaries dropped to 55.1 in February from 55.7 in January. For comparison, the index averaged 60.0 from 2015-2020.
The news sent the Pound to Euro exchange rate down from 1.1749 to 1.1729 as GBP shed some gains after ending the previous week on a strong footing.
Pantheon Macroeconomics told Bloomberg that the KPMG figures were highly credible given that its survey methodology has a 25-year track record of capturing shifts in wage growth. ‘The latest survey results suggest that Bank of England policymakers need to cut interest rates soon.’
While Sterling may have settled back naturally after experiencing a late advance last week, the KPMG survey confirmed the official ONS wage report, which also showed that UK wage increases had cooled significantly, opening the door for
Threadneedle Street to cut interest rates in the coming months.
Given the back-to-back findings, forex traders began de-risking GBP positions. The Pound to Dollar exchange rate fell back on Monday, 11 March to 1.2840 after reaching a seven-month high of 1.2893 last Friday.
The survey did note some increases in starting pay rates as employers reacted to rising cost of living and competition for top candidates. However, the rate of salary inflation was the slowest tracked in over three years.
A year earlier in March 2023, GBP was beating back an advance by the US Dollar as American bond yields fell and forex traders scaled back expectations for future Fed rate hikes.
In the aftermath of the Silicon Valley Bank (SVB) collapse, the Greenback fell sharply when US bond yields fell faster than other markets. GBP was an early beneficiary, pushing higher on Monday 13th March as the week’s session got underway.
SVB’s collapse has sent shockwaves through the global banking system. After losses on its bond-heavy investment portfolio it went on the hunt for fresh funding. American and British regulators sprang into action to protect SVB depositors, with Westminster shepherding the sale of SVB's UK assets to HSBC.
Ahead of the bank’s fall into distress, the yield on two-year American government bonds rocketed to levels last seen in 2007. The sudden rise happened on trader expectations that the Fed will raise interest rates by 50 basis points next week. Bond yields then fell so quickly that markets now see a rate hike of 25 basis-points as more likely. The Dollar was hammered as a result.
