The pound sterling is facing increasing pressure against the US dollar, heading towards its longest losing streak in two years. This decline reflects investor concerns about the future of the UK economy and the potential for the Bank of England (BoE) to cut interest rates.
Options market indicators show a shift towards a negative outlook for the pound sterling. The one-month risk reversal, which measures the difference between demand for call and put options, currently reflects the most pessimistic view since February. This assessment coincides with the upcoming meetings of the Bank of England and the US Federal Reserve, as well as the deadline for tariff negotiations between the United States and China on August 1st.
Bank of England Governor Andrew Bailey hinted on Monday at the possibility of larger interest rate cuts if the labor market deteriorates faster than expected. These comments have led to increased bets on interest rate cuts by the BoE, with financial markets now expecting cuts of 58 basis points before the end of the year, compared to 51 basis points at the end of last week.
Pressure on the pound sterling is increasing due to recently released weak economic data. Data showed that the UK economy unexpectedly contracted by 0.1% in May, highlighting the downside risks facing economic growth. This data has reinforced expectations that the Bank of England will cut interest rates in August, unless inflation data in June shows a surprising improvement.
Monex analysts point out that the pound sterling may face further downward pressure due to the weak GDP data released last week. They believe that stable inflation may provide some support for the pound in the short term, but they warn that fiscal austerity, weak labor market data and contraction in monthly GDP indicate that the pound will continue to face sustained pressure in the medium term.
All eyes are on a series of key data this week, including inflation reports from the UK and the US, as well as UK labor market data. This data will provide crucial insights into the course of monetary policy for the Bank of England and the US Federal Reserve.
Economic indicators like GDP, inflation, and employment rates are crucial for understanding the health of an economy. Changes in these indicators can significantly influence currency values.
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