Pound Outperforms Amid Global Market Jitters

The pound performed well against major currencies on Tuesday due to a stock market sell-off and political uncertainties. Sterling rose 0.1% to $1.27, its highest in 16 years against the yen, and 0.1% against the euro. Investors are shifting towards safer assets like the U.S. dollar.

The pound was one of the better performing major currencies on Tuesday, as a sell-off in the stock market and jitters around politics on both sides of the Atlantic drove more investors towards the comparative safety of the U.S. dollar. Sterling was last up 0.1% at $1.27, compared with declines in the value of the euro and yen.

The pound was trading around its highest in 16 years against the yen, which has weakened against the dollar towards levels last seen in April that triggered official Japanese buying to support it. Against the euro, the pound strengthened 0.1% to 84.51 pence, nearing last week's almost-two-year high.

A 10% sell-off in shares of megacap Nvidia over the last two trading days has unsettled investors, driving more flows into the likes of government bonds and the dollar. Meanwhile, with a general UK election due on July 4, Bank of England policymakers are unlikely to give any new steer on where interest rates might head. Traders are pricing in roughly two rate cuts this year, with around a 55% chance of the first one coming in August.

This is in line with market-based expectations for the Federal Reserve, which has said it only sees the need for one U.S. rate cut this year. "Looking at forward curves, it is remarkable that UK interest rates remain priced so close to the U.S.," ING strategist Chris Turner said.

"Our conviction view this summer is that UK rates will be re-priced lower starting with a rate cut in August. And this should lead to a lower pound," he said. A recent Reuters poll of analysts offers a median three-month forecast of $1.26 for sterling, about 0.8% below current levels.

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