Sterling gains on weak dollar, UK services growth

The pound sterling strengthened on Wednesday, capitalising on a weakening dollar and a UK services sector report indicating slower growth in June, though better than initial forecasts.

Against most currencies, the US dollar softened on Wednesday, except against the Japanese yen and Chinese yuan, following remarks by Federal Reserve Chair Jerome Powell suggesting imminent interest rate cuts.

Sterling rose by 0.13 per cent to $1.2703 by the day’s close, marking its fifth consecutive day of gains. It remained steady against the euro at 84.72 pence.

The S&P Global UK Services Purchasing Managers Index dipped to 52.1 in June from May’s 52.9, its lowest since November, but was revised up from an initial estimate of 51.2. S&P Global attributed the slowdown to companies adopting a cautious stance ahead of Britain’s national election, expected to favour the Labour Party based on current opinion polls.

Deutsche Bank strategist Shreyas Gopal noted that while the election outcome might not be a significant market event, attention would shift to upcoming factors such as France’s parliamentary election on July 7 and key UK economic data later in the month.

These developments could influence the Bank of England’s decision on interest rates at its August meeting, with Gopal maintaining a positive outlook on the pound and recently revising down the euro/sterling year-end forecast to 82 pence.

Futures markets indicate a roughly 50/50 chance of a rate cut at the Bank of England’s August 1 meeting, with full pricing for a cut by September.

Investor sentiment towards the pound remains strong, with a current long position valued at $3.5 billion, down from a recent peak of $4.15 billion, according to weekly data from the US markets regulator.

Attribution: Reuters.