Pound heads for longest decline since Truss era
THE pound is on its longest losing streak since traders dumped the currency ahead of Liz Truss becoming prime minister last year.
Sterling has slumped more than 2 per cent against the US dollar last week to approach US$1.28. It’s also performed poorly against the euro, on track for its worst week since February.
The moves highlight the headwinds the pound faces in the second half of the year after fresh economic data last week. A bigger-than-expected fall in inflation has prompted traders to pare bets on the extent of further interest-rate hikes from the Bank of England (BOE), removing a key pillar of support for the currency.
“Sterling has topped out,” said Javier Corominas, director of global macro strategy at Oxford Economics. “Economic surprises, which had been pound supportive, are now beginning to turn.”
Traders see the BOE rate peaking at about 5.9 per cent by February, and are torn as to whether the central bank will deliver another half-point hike next month. Earlier in July, markets were entertaining the prospect of a peak at 6.75 per cent, giving the pound a comparative rate advantage that had turned it into the year’s top Group-of-10 currency.
That capped a turnaround from last September, when Truss’ plans for unfunded tax cuts led sterling to collapse to a record low at $1.035.
While it’s since recovered on policy shifts and aggressive BOE hikes, fears now abound that the central bank may have already pushed too hard on interest rates and hurt the economy. Former BOE chief Mervyn King warned this week the central bank is ignoring signals from money supply data and risks triggering a recession.
“What we’ve seen since CPI data this week is just a reality check,” said Jane Foley, head of currency strategy at Rabobank. “I don’t think there’s any reason for the market to be long sterling as it was.” BLOOMBERG
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