
The British Pound has come under further pressure on Monday, and major events this week will likely trigger high volatility in Sterling foreign exchange markets.
Risk appetite has recovered in global markets with the FTSE 100 index, for example, rebounding to 2-month highs, which will help underpin the Pound.
There has, however, been increased talk of a Bank of England rate cut this week which has undermined the UK currency.
The Pound to Dollar (GBP/USD) exchange rate and Pound to Euro (GBP/EUR) exchange rate are both at 2-week lows, trading at 1.2830 and 1.1855 respectively.
According to ING; “We still believe that a move to 0.850+ would be entirely warranted in the near term. (GBP/EUR below 1.1765).
There are two major interest rate decisions this week which will have a big impact on the Pound.
On Monday, markets will also assess the statement on government finances from Chancellor Reeves with a downbeat assessment and spending cuts likely to curb optimism over the UK growth outlook, especially with increased talk of tax increases in the Autumn.
This would also tend to undermine the Pound.
As far as the BoE is concerned, a majority of investment banks expect a rate cut, but there is a high degree of uncertainty.
Michael Brown, senior research strategist at Pepperstone commented on the Bank of England; “The August decision is, perhaps, one of the toughest MPC decisions to forecast in recent memory.”
The latest COT data, released by the CFTC, recorded a further increase in long, non-commercial Pound positions to a fresh record high.
The data was complied on Tuesday and there may have been consolidation since then, but the data overall will maintain the risk of sharp position adjustment and at least a short-term liquidation of Pound positions.
MUFG expects only limited setbacks; “Looking beyond the near-term position adjustment, fundamental drivers remain supportive for the GBP.”
The Federal Reserve will announce its interest rate decision on Wednesday.
There are very strong expectations that the Fed will leave rates on hold at 5.50% this week, but markets are also convinced that there will be a cut in September.
MUFG sees scope for medium-term dollar losses, but is not convinced that there will be further near-term losses.
The bank commented; “The US rate market is already more than fully pricing in a 25bps cut at the September FOMC meeting so unless Chair Powell provides a signal that the Fed could consider cutting rates in larger increments then there is a high hurdle for the USD to weaken much further on the back of next week’s policy update.”