LONDON: The pound fell for a fifth day on Tuesday as rising US bond yields supported the dollar, but is still up 18% from a year ago when former British Prime Minister Liz Truss’ borrowing plans drove it to a record low.
Traders believe the Bank of England (BoE) has almost certainly reached the end of its campaign of raising interest rates, after the central bank last week left monetary policy unchanged with the economy slowing and inflation drifting lower.
Sterling has been steadily sliding from a 15-month high in July, as it has become increasingly clear from macroeconomic data and from central banks’ rhetoric that interest rates are more likely to rise in the United States than in the UK.
The dollar is headed for a 2.4% rise in September, egged on by 10-year US Treasury yields hitting their highest since before the financial crisis in 2007, after the Federal Reserve signalled last week rates will stay higher for longer.
The pound was last down 0.3% at $1.2174, around its lowest since March.
It is set for its biggest monthly loss since last September, when it hit a record low of $1.0327 after the Truss government unveiled a “mini budget” that contained up to 45 billion pounds ($54.77 billion) in unfunded tax cuts.
Given how much of the decline in sterling is down to the strength in the dollar right now, its performance against the euro gives a cleaner read of investor sentiment towards sterling, RBC Europe chief currency strategist Adam Cole said.
“Sterling, until very recently, as been propped up by expectations for more BoE hikes and that is diminishing after the three hits that we took last week,” he said.
A cooler August inflation reading, a survey of British business activity that showed far more weakness than expected in early September, and the BoE’s decision to leave interest rates unchanged knocked 1.1% off sterling’s value.
“There is half a rate hike priced in going forward and, if that unwinds - which we think it probably will on balance - then there may be a little more sterling underperformance to come on the back of that,” Cole said.
He added his team have a year-end target of 89 pence for the euro/sterling exchange rate, implying a drop of around 2.4% for the pound from 86.95 pence, where it was trading on Tuesday.
With the erosion of its so-called yield advantage, the pound is now virtually flat on the year, having boasted an 8% gain back in July and ranked as the best-performing G10 currency against the dollar of 2023.
Strategists at Nomura last week cut their sterling target to $1.18 and cited the monetary policy outlook in the United States as the main justification for the likely strength in the dollar.
On a more UK-specific note, they pointed to several factors that do not make for a supportive backdrop for the pound, including outflows of capital from British stocks and bonds, an overhang of bullish speculative positions and British data surprises.