The British pound has silently been the strongest currency in the world. Of course, we always talk about the dollar, but the pound is actually powerful. However, it looks like the pound is set for a bad month since its crisis in 2022. Some global economic shifts gain significant media attention, while others develop gradually and only become apparent to the general public when they start to affect their financial situation. The last several weeks have served as a reminder to the UK of how easily trust in a currency can be lost and how difficult it is to regain once it has been lost.
The dollar might gain as the pound is losing against it
The pound headed towards its largest monthly loss against the dollar since September 2022 on Thursday, reflecting growing confidence among investors in the outlook for the U.S. economy and increasing pessimism over the British one. Sterling GBP=D3 was down 0.15% on the day at $1.322 and weakened against the euro, which rose 0.4% to 86.46 pence.
In July, the pound has fallen by 3.7%, the most since losing 3.9% and hitting a record low in September 2022, during then-Prime Minister Liz Truss’s budget-induced market crisis. The pound is still up nearly 6% against the dollar this year, but that’s softened dramatically from a year-to-date gain of almost 10% at the start of the month.
As the Fed remains unchanged and the UK struggles, investors favour the dollar
Following Wednesday’s two-day policy meeting, the Federal Reserve left U.S. interest rates unchanged, as expected, and Chair Jerome Powell gave no indication of when they might fall again. In the meantime, U.S. data has painted a far rosier picture of the world’s largest economy than UK data has of the British economy. U.S. data releases this week, including second-quarter economic activity and some measures of employment, have added to that.
The Citi U.S. economic surprise index has overtaken its UK counterpart this week for the first time since April. With the Bank of England expected to almost certainly deliver two more rate cuts this year, according to money markets, and a far lower chance of two more cuts from the Fed, investors are ditching the pound.
A number of forces have worked together to lower the pound
- While it is a global issue, inflation has caught up with England, and this has caused the pound to go down.
- Poor economic growth. It is one of the developed economies, but growth has been slow to stagnant.
- The dollar seems to be just growing stronger by the day, despite global pressure, but the pound can feel the global pressure.
The difficulties facing the pound remind some people of the turmoil that preceded the 2022 mini-budget. Plans for government borrowing at the time shook the markets so much that immediate action was required. The comparison illustrates how fragile market confidence can be, even though the current decline is less severe. Additionally, economies like China are feeling the heat too, as it pledges economic aid and targets unfair competition.
Weekly data from the U.S. Commodity Futures Trading Commission shows speculators are neutral on the pound, having whittled back the bullish positioning that had prevailed continuously since February. Whether the pound will stabilise or continue to decline in the next weeks is the key question. The Bank of England’s actions and whether fresh economic indicators indicate improvement will have a significant impact. Another thing identified that has caused the pound to lose its value is the UK market’s dip over fiscal credibility fears. Every change in the currency markets is a story of trust.