Sterling fell against the US dollar following global stock markets’ plunge. The fall was driven by a sell-off in Chinese shares, which dampened risk sentiment and led to increased trading of the US dollar ahead of a US Federal Reserve policy meeting.

Risk-averse market sentiment

As we have seen recently, the pound is sensitive to how global markets are fairing as well as how the pandemic is progressing. According to some analysts, the pound could find support if cases continue to fall, especially since data on Monday showed that new Covid-19 cases in Britain had fell for five consecutive days. Market analysts have suggested that the pound’s fall was mainly driven by nervous and risk-averse market sentiment due to the sell-off of Chinese tech stocks. Risk trades have been hit as a result and so has the pound.

For investors, a lot will depend on the two bank meetings coming up: the two-day Fed meeting later on Tuesday, and the Bank of England meeting next week. The BoE’s interest-rate setter Gertjan Vlieghe while speaking in an event explained that the the central bank should not cut back its stimulus before 2022, as the recent rise in inflation is temporary while Covid-19 poses a significant risk to growth.

Covid-19 declines offer a boost

Earlier on Tuesday, the pound got a boost after the number of new positive cases fell significantly. Investors will expect to see more statistics about the numbers of cases and deaths before they can make informed decisions.

The recent rising cases had an impact on economic data which showed that the economy was growing at a slow pace as businesses complained about the rising cases and employees self-isolating after coming in close contact with someone who had been tested positive. The ongoing pandemic and the risks posed by it have confirmed that it is perhaps too soon for the Bank of England to raise interest rates, as it needs to continue its financial support rather than tighten its programme. The rise of the Delta variant of Covid-19 combined means that the bank needs to continue offering support to the economy.  

If Covid cases continue to fall then the pound could find support. The UK has also acted as a test case, and it remains to be seen whether its decision to reopen its economy has been the right one. Nonetheless, analysts argue that data has shown that the UK economy does not depend on the virus and that vaccines are working. If the country does succeed to beat the Delta variant, without its economy being massively affected with further restrictions, then their example could be followed by other economies. This could further help the pound which is influenced by global sentiment.

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