Pound on track for longest run of losses in almost a year

The pound is on track for its longest run of falls in almost a year, as financial markets clawed back losses from Monday’s sharp sell-off.

After a turbulent week on the markets, sterling was heading towards its fourth weekly drop in a row on Friday afternoon, the longest run of losses since September 2023.

The pound weakened to $1.277 on Friday – on track for a 0.3% drop against the US dollar this week. Over the past four weeks it has lost 2.2 cents, or 1.7%.

Sterling was also on track for its fourth weekly fall against the euro, having dropped to €1.168 against the single currency.

Currency analysts said the Bank of England’s interest rate cut last week has put pressure on the pound, as had expectations of one or two more cuts before the end of 2024.

The pound had rallied in the first two weeks of July, as traders anticipated less political uncertainty after Labour’s landslide general election victory.

Shahab Jalinoos, the global head of currency research at UBS, said “the Labour honeymoon is likely over” and gloomy headlines had hit market sentiment.

“News of rioting in the UK and some tensions about high odds of tax hikes at the 30 October budget are also souring the mood now Labour’s election win last month is in the rearview mirror,” wrote Jalinoos in a research note.

The London stock market ended the week on a brighter note. Having tumbled by 2% on Monday, the FTSE 100 index clawed almost all those losses back by the end of the week. The blue-chip share index gained 0.28% on Friday to close at 8,168 points, down just six points for the week.

Monday’s turmoil was blamed on fears of a US recession, and a surprise interest rate rise in Japan that pushed up the cost of borrowing in yen.

But global market staged a comeback through the week; Japan’s Nikkei followed its biggest drop since 1987 with its largest rally since 2008. On Thursday, Wall Street posted its biggest jump in two years.

Karsten Junius, the chief economist at J Safra Sarasin Sustainable Asset Management, said the markets had been “overly pessimistic” when they tumbled, so the partial recovery since is justified.

“Financial markets received a wake-up call as markets corrected due to concerns about an imminent US recession, the unwinding of yen carry trades and a more negative view about the earnings potential of US equities in a global slowdown. Geopolitical tensions in the Middle East contributed to the general risk-off sentiment.”

“While there is an element of truth in all of these points, the market has been overly pessimistic,” Junius added.

Investors warned that the period of turmoil may not be over, as traders weigh up how soon, and how sharply, the US Federal Reserve will cut interest rates.

“We expect market volatility to remain high due to the current lack of liquidity across a wide range of assets, as investors still struggle to digest the global economic uncertainty, especially following the latest slew of mixed narratives from Fed officials,” said Pierre Veyret, a technical analyst at ActivTrades.

Analysts at Bank of America said Wall Street’s goal for August and September appears to be “bossing the Fed into big rate cuts”.