Sterling slips as stronger U.S. dollar, Fed rate outlook pressure UK currency

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Sterling slips as US dollar, Fed weigh

Highlights

Sterling falls 0.23% to $1.3234 as U.S. Treasury yields rise and markets anticipate Thursday's U.S. monthly employment data.
The pound posts a 0.2% monthly loss in June and is down 1.6% year-to-date, its weakest first-half since 2022, as political uncertainty grows.
Money markets now price a 90% chance of a Bank of England rate hike by year-end, down from previous expectations of up to three increases.

Dollar strength and central bank signals drive moves

As reported by Reuters, the pound is down 0.23% at $1.3234, its first daily decline in a week, as higher U.S. Treasury yields support the dollar before Thursday's U.S. monthly employment data.

Sterling has risen for the previous four days, its longest run of daily gains in a month, but a broader rebound in the U.S. currency is weighing on it and other peers. Investors are also watching the European Central Bank's annual forum in Sintra, where Warsh is due to join a panel and later address the gathering on Wednesday.

Markets are scrutinising his remarks for clues on the path of U.S. interest rates in the coming months. The jobs report this week is also seen as a major risk event for currencies because it could either reinforce or challenge expectations that the Federal Reserve may raise rates as early as this month.

UK outlook faces political and rate uncertainty

The pound ends June with a 0.2% monthly loss, taking its decline in the first half of the year to 1.6%. That marks sterling's weakest start to a year since 2022, when it dropped nearly 10% between January and June.

Another expected change in British leadership is adding to investor unease, with Labour Prime Minister Keir Starmer stepping down and Andy Burnham seen as his likely replacement. Investors are weighing how a new government leadership phase could support the economy without adding pressure to already strained public finances.

Against the euro, however, sterling rallies through the second quarter and gains 1.4%, trading around its strongest level since last August. At the same time, expectations for Bank of England rate increases this year have moderated after hostilities in the Gulf subside and oil prices return to pre-war levels.

Money markets show traders now price in a 90% chance of a Bank of England rate hike by the end of the year, down from a point when as many as three increases were priced in. The central bank meets later this month, and economists expect no change in rates, while Governor Andrew Bailey is also due to speak on Wednesday.

In our earlier article on EUR/USD staying under pressure amid broad dollar strength, we noted that the pair extended its June decline as higher US yields and a “higher for longer” Fed stance kept demand for the dollar elevated. We also highlighted that traders were watching the ECB Forum in Sintra for policy clues, with the next move likely to hinge on incoming US labor and inflation data alongside shifting Fed-ECB expectations.

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