Sterling Hits Five-Week Low Amid Rate Cut Speculations

The pound fell to a five-week low against the dollar, influenced by market reactions to rate cut speculations from the Bank of England and the Federal Reserve. Despite its sensitivity to equity market swings, the sterling's longer-term outlook hinges on rate differentials, with potential resistance around $1.30.

The pound resumed its decline against the dollar on Tuesday, hitting a five-week low at $1.2699, its lowest level since July 3. The currency steadied against the euro after significant fluctuations the previous day.

Analysts attribute the pound's fall, now down 2.6% from mid-July's peak of $1.30, to traders adjusting their positions before the Bank of England's rate cut. Currency strategist Patrick Ernst of UBS Global Wealth Management noted that the pound's resilience against swings in other assets, such as equities, mitigated the impact of changes in rate outlooks.

Market expectations for Federal Reserve rate cuts have grown, now predicting over 100 basis points of easing across three meetings this year, compared to less than 50 bps from the Bank of England. Despite this shift, the pound, considered a high-beta currency, has been pressured by sharp sell-offs in equities over the past two trading days. The pound also saw minor weakening against the euro and yen due to changes in carry trades and safe-haven flows.

Long-term prospects for the pound remain dependent on rate differentials. Ernst anticipates resistance around $1.30 will hold until the Fed enacts its expected cuts, likely weakening the USD later in the year.

(With inputs from agencies.)