Sterling weakens against euro amid focus on struggling economy.

Sterling weakens against euro amid focus on struggling economy.

Sterling Stumbles as Euro Strengthens and UK Economy Weakens

London, Aug 9 – The sterling has taken a hit as it fell against the US dollar and the euro, hovering near its one-month low. Traders are feeling cautious about the currency, with concerns mainly focused on the weak UK economy. At 1103 GMT, the pound was down 0.1% against the dollar at $1.2737 and 0.3% lower against the euro at 86.21 pence.

Market players are attributing the euro’s strength as the primary driver behind this decline. Italian banking stocks, which had experienced losses in the previous session, regained some ground after the Italian government eased a windfall tax on the sector. Stuart Cole, the Chief Macro Analyst at Equiti Capital, stated that this development provided a moderate boost to the euro, thereby explaining sterling’s softness.

However, he also believes that the euro is pushing against an open door when it comes to the pound. The recent slide in the pound’s value over the past week reinforces the market’s bearish view, which reflects underlying weaknesses in the UK economy. Sterling has plummeted more than 3% since July 13, when it reached $1.31440 against the dollar, its highest level since April 2022.

The surge in interest rate expectations has been tempered by lower-than-expected British inflation in June. Colin Asher, a senior analyst at Mizuho Corporate Bank, foresees further weakness in the pound in the short term. He mentions that there was excessive excitement regarding nominal interest rates going up, but the data shows that GBP positioning is already elevated. Asher expects the economy to soften, leading to a decrease in rate expectations that will weigh on the pound.

On August 3, the Bank of England (BoE) raised interest rates for the 14th time since late 2021 in an attempt to curb inflation. Traders are currently predicting a 60% chance of a 25 basis point hike from the BoE at its next meeting on September 21, with a 40% chance of no change. The uncertainty surrounding the future movement of interest rates adds to the caution surrounding the sterling.

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In conclusion, the sterling’s decline against the dollar and the euro can be attributed to the strength of the euro and concerns about the underlying weaknesses in the UK economy. Market players see the recent loss in the pound’s value as reinforcing a bearish view on the currency. With expectations of a softer economy and easing rate expectations, the pound is expected to face further softness in the short term. The next meeting of the Bank of England will provide further insight into the potential direction of interest rates, which are an important factor influencing the movement of the sterling.

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