Market News

By Vassilis Karamanis

(Bloomberg) -- The pound has relinquished its advance against the dollar this year as investors anticipating stronger US growth and inflation pile into the greenback. 

After seven straight weeks of losses, sterling has fallen back below the level it started the year, to trade at $1.2666 on Friday. While the pound still looks better than many other peers, that’s the longest weekly losing streak in a decade and erases gains of more than 5%.

Up until this week, the pound had managed to buck the greenback’s strength supported by expectations that interest rates in the UK would fall more gradually than in the US. But as the market prepares for sweeping tariffs and tax cuts under Donald Trump’s administration, that advantage is being eroded.

“Recent sterling weakness has principally been a story of US dollar strength,” said Matthew Amis, Investment Director at abrdn, adding he sees little reason for a rebound. 

The Bloomberg Dollar Spot Index reached the highest level in two years, and is now up more than 5% since the end of September when the market started pricing a Trump victory. The greenback has gained against all 31 major currencies tracked by Bloomberg in that period. 

While the pound was hit by the dollar’s advance, it’s outperforming all other Group-of-10 peers and is firmly up against the euro. The UK services-based economy is seen as less vulnerable to trade tariffs than the rest of Europe, and the Bank of England is expected to lower rates less aggressively than the Federal Reserve and the European Central Bank.

Still, options trading suggests the UK currency could enter a phase of structural weakness, as bearish sentiment builds on longer tenors. Both speculative and institutional investors added long-dollar exposure across the board this week, according to FX traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.

Britain’s growth remains subdued, supporting the case for more rate cuts. Data released on Friday showed the UK economy cooled by more than expected in the third quarter after a surprise contraction in September as anxiety built over the Labour government’s budget plan on Oct. 30.

BOE’s Catherine Mann warned on Thursday that the UK’s growth and inflation could be hit by shockwaves from a global trade war sparked by Trump. Traders have added to easing bets in the past couple of days, pricing 66 basis points of rate cuts by the end of next year from 57 basis points on Wednesday.

“There’s a sense that there’s a certain fragility to the UK growth and budgetary outlook which could be exposed if there’s a global trade war,” said Shahab Jalinoos, global head of currency research at UBS Group AG. “We are looking for a weaker pound against the dollar.”

--With assistance from Alice Atkins.