Sterling Depreciates Due to Combined Impact of US Dollar, Euro

The British pound approached its lowest point in nearly two months against a resilient US dollar on Tuesday. The US currency experienced an uptick due to a sudden increase in Treasury yields, while the euro continued its moderate rally observed over the past week.

Investors in U.S. assets are considering the potential implications of a second Donald Trump presidency, following President Joe Biden’s recent debate performance and the Supreme Court’s ruling on the former president’s immunity from prosecution related to the 2020 election. This is according to Chris Weston, the head of research at Pepperstone.

With the dollar exhibiting a general upward trend, the value of sterling depreciated by approximately 0.25% during the trading day, reaching $1.2618. This level closely approached the recent low of $1.2616 recorded last week, marking the weakest position of the pound since May 15. In relation to the euro, the pound maintained a stable position at 84.935 pence, although it remains near its lowest point since early June.

Christine Lagarde, President of the European Central Bank, stated on Monday that the central bank is not considering an immediate reduction in interest rates. This announcement resulted in a temporary appreciation of the euro against the pound on the previous day, but it had little impact on the single European currency on Tuesday.

“Funnily enough, the biggest casualty of Lagarde’s comments and the French election has been the pound, whose decline in value against the euro has sent the overall pound index to its lowest level for five weeks,” Caxton strategist David Stritch said.

The Initial round of voting in the recent French elections yielded a surprising outcome. While the far-right National Rally (RN) secured the largest portion of the votes, It fell short of many initial projections. This unexpected result has had a stabilizing effect on the euro.

Currently, markets anticipate at least one additional European Central Bank (ECB) interest rate reduction this year, although the likelihood of a second cut has diminished somewhat.

Concurrently, the United Kingdom will hold elections on Thursday, with the opposition Labour Party widely projected to win, marking the end of 14 years of Conservative Party governance. Given the UK’s constrained fiscal situation, any new government will have limited scope to increase spending, potentially eliminating a catalyst for sterling weakness and maintaining controlled volatility.

July 02, 2024