Market Update: Sterling Pressured as Stronger Dollar and UK Political Uncertainty Drive FX Markets
Currency markets have moved sharply over the past 24 hours, with the US Dollar gaining ground and the Pound coming under pressure against the Dollar.
The main driver has been a shift in interest rate expectations. Stronger US economic data has increased market expectations that the Federal Reserve may need to raise interest rates again this year. That has pushed the Dollar higher and made life difficult for most major currencies, including Sterling and the Euro.
At the same time, the UK is dealing with fresh political uncertainty following Keir Starmer’s resignation as Prime Minister. Markets are now watching closely to see whether Andy Burnham becomes the next Prime Minister and, more importantly, what his plans would mean for borrowing, tax and public spending.
For businesses and individuals with upcoming currency exposure, this is another reminder of how quickly rates can move when politics, inflation and central bank expectations all shift at the same time.
GBP
Sterling has had a difficult session against the US Dollar, with GBP/USD falling towards the 1.3150 area.
The Pound is being hit from two sides. Firstly, the US Dollar is stronger as markets price in a greater chance of further US interest rate rises. Secondly, UK confidence has been weakened by both political uncertainty and disappointing economic data.
The latest UK business surveys showed that private sector activity contracted again in June. The services sector, which is a major part of the UK economy, fell to its weakest level in more than three years. This suggests businesses are still facing pressure from higher costs, weaker demand and uncertainty around the outlook.
With no major UK data due in the immediate short term, Sterling may struggle to find its own direction. For now, GBP/USD is likely to remain heavily influenced by US Dollar movements, Federal Reserve expectations and political developments in Westminster.
EUR
The Pound has performed better against the Euro than it has against the Dollar, with GBP/EUR trading near the important 1.16 level.
This level has been difficult for Sterling to break through in recent months, so the market will be watching closely to see whether the move can hold. A clean break above this area could support further gains, but the Pound still faces plenty of risks.
One reason GBP/EUR has held up is that the Eurozone economy remains weak. The latest Eurozone business surveys showed that activity is still contracting, although the pace of decline has eased. Services remain under pressure, while manufacturing is holding up slightly better.
The Euro has also been held back by softer inflation pressure, which may reduce the need for the European Central Bank to keep raising interest rates aggressively.
That said, Sterling’s strength against the Euro should not be taken for granted. UK political uncertainty, weak domestic growth and concerns around future tax and spending plans could still weigh on the Pound over the coming months.
USD
The US Dollar has been the strongest of the major currencies this week.
Better US economic data has reinforced the view that the US economy remains more resilient than the UK and Eurozone. The latest US business surveys showed continued expansion, with manufacturing performing particularly well.
Markets are now increasingly focused on whether the Federal Reserve may raise interest rates again this year. Higher US interest rate expectations usually support the Dollar, as investors are attracted to the higher return available on Dollar assets.
The Dollar has also benefited from wider market caution. Recent volatility in global stocks, geopolitical uncertainty in the Middle East and uncertainty around energy markets have all added to demand for safer assets.
The next key event for the Dollar will be US PCE inflation data. This is one of the Federal Reserve’s preferred inflation measures, so a stronger reading could add further support to the Dollar. A softer reading could help take some pressure off Sterling and the Euro.
Oil, Geopolitics and Market Sentiment
Oil prices have eased as concerns around the Strait of Hormuz have reduced, but the situation remains fragile.
Any renewed tension in the Middle East could quickly push energy prices higher again. That would matter for currency markets because higher energy costs can feed into inflation, influence central bank policy and affect business confidence.
For now, the market is taking some comfort from signs of improved oil flows and reduced supply fears. However, geopolitical risk has not disappeared.
What to Watch This Week
The main focus for the rest of the week will be:
US PCE inflation data
Federal Reserve rate expectations
UK political developments and any comments on fiscal policy
GBP/EUR around the 1.16 level
GBP/USD around the 1.3150 area
Oil prices and Middle East headlines
The market is moving quickly, and some rates have changed significantly in a short period of time.
For businesses with upcoming payments, the key risk is waiting for a perfect level and then seeing the market move sharply the other way. With Sterling exposed to both UK political uncertainty and US Dollar strength, it may be worth reviewing upcoming requirements and considering whether part of the exposure should be protected.
Forward contracts, limit orders and structured payment planning can all help reduce the risk of being caught out by sudden moves in the market.