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Sterling holds above US$1.31 as dollar jumps after Fed minutes

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Sterling touched a one-week low on Thursday but held above US$1.31 as less dovish than expected minutes from the US Federal Reserve's latest policy meeting prompted bears to buy into the heavily shorted greenback.

[LONDON] Sterling touched a one-week low on Thursday but held above US$1.31 as less dovish than expected minutes from the US Federal Reserve's latest policy meeting prompted bears to buy into the heavily shorted greenback.

The pound traded at US$1.3127, up 0.2 per cent on the day, at 10.50am GMT, recovering from a session low of US$1.3062 hit in early trade but still far from Tuesday's eight-month high of US$1.3276.

Against the euro, sterling fell 0.2 per cent to 90.17 pence.

The Fed minutes were vague, merely saying a number of committee members thought it would be helpful to make a revised statement on its policy strategy at some point, without providing details or timing. They also struck a cautious tone about the US economic recovery.

That was enough to push risk assets - a category recently including sterling in that the currency weakens when deteriorating market sentiment strengthens demand for the safe-haven dollar - into a likely short-lived correction.

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"Risk assets around the world are suffering a corrective 24-hours," said ING analysts.

"The catalyst has been a set of FOMC (Federal Open Market Committee) minutes that has failed to feed the rally by seemingly neither offering enough clarity on strategy changes nor fresh stimulus."

The pound has gained more than 7 per cent against the US dollar in the past three months, but analysts have pointed out that this has more to do with the performance of the greenback. It is not a case of being over optimistic on cable as the coronavirus pandemic and Brexit worries mostly justify a sterling depreciation, they say.

Six-month risk reversals - the difference between put and call options - suggest money managers prefer selling the pound over buying it in the period which incorporates Britain's full exit from the European Union in December.

The UK has reiterated many times it still hopes for a post-Brexit trade deal to be achieved in September, while both parties have given themselves a self-imposed deadline by October.

In theory, there is still time until the end of this year to forge a deal, but with little obvious progress so far, the amount of time available looks limited, analysts say.

REUTERS

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