The pound sank to its lowest level against the dollar since March 2020 as traders eyed a widening gulf between the Bank of England and Federal Reserve rate-hiking cycles.
The UK currency slid as much as 0.6 per cent to $1.2064, taking year-to-date losses to almost 11 per cent. The currency has been under pressure from a resurgent greenback after hotter-than-expected US inflation for May fueled expectations of a more aggressive Fed tightening this week.
Concerns are growing that the BOE may have to take a more cautious approach to raising rates after data on Monday showed a surprise contraction in the economy in April. Sterling also faces political risk such as uncertainty over the fate of the agreement with the European Union over Northern Ireland.
Diverging central bank approaches could be seen this week, with both the Fed and the BOE set to announce rate decisions. Nomura International Plc foreign exchange strategist Jordan Rochester is targeting a fall in cable to the $1.20 level, anticipating that BOE officials will avoid more aggressive tightening, such as a 50-basis-point hike, due to a focus on weak consumer confidence.
“An underwhelming Fed could provide a modicum of support for the pound at current levels, but the big question is whether a dovish repricing in UK money markets will impact the currency right now,” said Simon Harvey, currency analyst at Monex Europe Ltd, who recommends a long euro versus pound trade.
“If the relationship between rates and currency markets holds up, the BOE will likely induce further GBP downside, but it is a big ‘if’ given how disconnected implied rates are from the BOE’s own messaging.”