Sterling Slips Amid U.S. Recession Fears and Global Market Unease

The British pound eased on Monday due to fears of a U.S. recession, driving investors toward safer currencies like the Swiss franc and the euro. Concerns heightened after last week's data and the U.S. monthly employment report. The Bank of England's rate cut has also impacted the sterling, which has weakened against major currencies.

The British pound eased on Monday as concerns over a looming U.S. recession prompted investors to seek refuge in safer currencies like the Swiss franc and the euro.

A flurry of data released last week, capped by Friday's U.S. monthly employment report, has stoked fears that the world's largest economy might be slowing more rapidly than anticipated. Traders now predict a 90% probability that the Federal Reserve will slash interest rates by half a point in September to avert further economic decline.

The Bank of England's first rate cut in four years, announced last week, has also weighed on sterling. However, the existing global market jitters have led to significant investment in short-term U.S. government bonds, which has driven yields down faster than on UK bonds, thereby providing some stability to the pound.

U.S. two-year Treasury yields have plummeted by 60 basis points (bp) since last Monday, while two-year gilt yields have seen a 35-bp decline during the same period. Sterling fell by 0.3% on Monday to $1.2767 and dropped 0.6% against the euro to 85.72 pence. "The pound has been undermined by the marked deterioration in global investor risk sentiment," said MUFG strategist Lee Hardman. Sterling was also down 1.5% against the Swiss franc, trading at 1.0811 francs.

Hardman highlighted that the pound has been one of the weakest among major currencies recently, partly due to the Bank of England's rate cut and the reduction of investor exposure to the currency. Over the last five trading days, sterling has fallen 0.8% against the dollar, while the euro and the New Zealand dollar have risen by 1.2% and 0.5%, respectively.

Short-term investors also reduced their bullish positions on sterling for the first time in a month last week, according to data from the U.S. markets regulator. Speculators cut their net long position in sterling futures by $2.53 billion to $8.947 billion, not far from the previous week's $11.468 billion record long. "It leaves the pound vulnerable to further weakness in the near-term from the scaling back of excessive long positioning," Hardman added. Recently, the Japanese yen surged by over 7.3% against the dollar and a similar amount against sterling, benefiting from rising domestic interest rates just as Fed rate cuts loom.

(With inputs from agencies.)