Sterling Falls as Risk Off


Sterling fell against a basket of currencies on Friday as market sentiment shifted to risk-off following an aggressive sell-off in global stock markets.

Volatility in global stock markets has significantly influenced the value of sterling since the outset of the pandemic in March 2020 with sterling trading in close alignment with stock market swings. Often, sterling has appreciated when stocks have rallied and depreciated when stocks have fallen.

The main cause for the sell-off in stocks can be attributed to the rise in US government bond yields where investors have sold US treasuries over fears of higher inflation and expectations that an economic rebound in the US may in fact prompt the Federal Reserve to tighten their ultra loose accommodative policy. A tightening of Fed monetary policy could include withdrawing generous stimulus and potentially raise interest rates sooner than current market expectations. Thus, making it more expensive for businesses to borrow money which could limit further growth.

For now, sterling remains considerably supported. The main causes are: the U.K’s impressive vaccine rollout programme which plans to have offered everyone the chance of a vaccination before July end, their is a roadmap out of lockdown which could have all industries open by June and the Brexit deal struck in late December has also helped erased much of the uncertainty which strained the British currency for the last four years.

This week investor focus for sterling will be on the Chancellor Rishi Sunak’s Spring budget which is set to be announced on Wednesday. Rumours have circulated that the Chancellor could be set to extend furlough until the summer and may raise corporate taxes. As such, we can expect some volatility for sterling in the middle of the week.

Economic calendar

13:00 – EUR – Harmonized Index of Consumer Prices (YoY) (Feb) Expected 1.6% Previous 1.6%
15:00 – USD – ISM Manufacturing PMI (Feb) Expected: 58.8 Previous 58.7
16:10 – EUR – ECB President Lagarde speech