The pound sterling and euro slumped to six-month lows against the US-dollar this week as bleak economic data continues to weigh on the minds of investors.
“The concept of higher for longer interest rates is providing a tailwind to the greenback which is trading at 10-month highs, sending the euro and the pound to six-month lows against it,” Victoria Scholar, head of investment at Interactive Investor, said.
She also noted how the pound is on track for its worst month since the fiscal fiasco around the mini-Budget last year, reflecting the increased risk of a recession in the UK as rising borrowing rates weigh on the economy.
GBP and EUR underperform counterparts
Matthew Ryan, head of market strategy at financial services firm Ebury, said that while the moves can be largely attributed to a strong greenback, both currencies are currently underperforming their G10 counterparts.
“Aside from valuation, concerns over the state of both economies have contributed to the sell-offs. Economic news out of the UK, in particular, has turned decidedly bleak in recent weeks.”
This, in reference to last week’s business activity PMIs and retail sales reports, in which both missed economists’ expectations. Meanwhile, Citigroup’s UK economic surprise index is now teetering just above the level of 0, its lowest level since March.
“News out of the euro area has not been much better. While the composite PMI of business activity came in above consensus in September, the index remained comfortably below the level of 50 representing contraction (47.1),” Ryan added.
Technical recession so far avoided
Despite initial reports to the contrary, a technical recession in the common bloc has so far been avoided, after the Q1 GDP report was revised upwards.
“That said, recent data makes for pretty grim reading, and another contraction in the bloc’s economy appears increasingly likely once the Q3 GDP data is released later in the year.” Ryan also noted.
Pound sterling outlook
Yahoo Finance UK spoke to Patrick Reid of Adamis Principle on the outlook for the pound sterling and he said there's a lot of evidence to suggest that it will continue to be weak for a number of reasons.
“One, US yields are screaming higher; two, hedge funds are unwinding their gilts purchases after the pause from the Bank of England – and thirdly, subdued growth, which is mounting on fears of stagflation.
"The only potential turnaround would be an increase in growth and renewed weakness in UK data. Apart from that nothing will change," he said.
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