The weakened global investor sentiment has kept the British currency under pressure against both the US dollar and euro. Analysts believe, however, that this will only be temporary as has already been seen throughout the last year. Fears of a global economic slowdown due to the pandemic and the spread of the Delta variant in Asia, as well as expectations the Federal Reserve will withdraw stimulus have hurt global sentiment.
The pound is mainly impacted by Bank of England policies and domestic economic developments but also by global investor sentiment. As it stands, there is a risk-off/risk-on binary which is affecting the foreign exchange market. Pro-cyclical currencies such as the AUD, CAD, and NZD tend to appreciate during good times, as opposed to countercyclical ones which appreciate in bad times. In a risk-off world where traders are not optimistic, and want to avoid risks, such currencies as the AUD and NZD become more vulnerable. In the current situation, the spread of the pandemic and the rapid rise of the Delta variant in Asia has hurt these pro-cyclical and commodity currencies as their main trade partner is Asia. The pound is also sensitive to global risk sentiment. The trajectory of the pound will then depend on investor sentiment.
Market sentiment: Factors to consider
The main concerns for markets are as we mentioned the Delta variant’s spread in Asia and worries about the Federal Reserve withdrawing financial support. These concerns have prompted traders to wind back their bets on a strong economic recovery. With the general sentiment being cautious and nervous, the pound is under pressure, while the US dollar has strengthened.
The Fed is expected to announce a reduction to its quantitative easing programme some time between the Jackson Hole Symposium and September. This will open the way to a rate hike towards the end of 2022 and beginning of 2023. The news has now pushed the US dollar higher, whereas the pound is as low as it was the end of July.
- Fears of slowing economic growth
The expected taper to the Fed’s programme combined with fears of slowing economic growth as Asian economies grapple with rising Covid cases has clouded market sentiment. The two factors are interrelated, as economies are currently dependent on and expectant of support from their central banks. With the Fed withdrawing support and the Delta variant spreading across Asia and hurting economic growth, the question is whether this is just a temporary concern. For analysts this won’t change markets massively and that the Fed’s anticipated tapering has already been priced in. The Covid threat has been there and continues to affect markets, and any weakness is seen by traders as an opportunity to buy cheaper assets.
So, this is seen as history repeating itself, with the pound’s weakness being just temporary.
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