Sterling is considered a risk-sensitive currency


Sterling fell on Tuesday as market sentiment shifted to risk-off amid a sell-off in global stock markets as well as investors acting cautiously ahead of key interest rate decisions for both the UK and US.

Sterling is considered a risk-sensitive currency and usually trades in tandem with global stock markets. Global stock markets were trading lower yesterday owed to souring risk sentiment following news that Chinese property company Evergrande could soon default on its debt repayments. The economic repercussions of a Evergrande collapse has spooked investors as the company currently have close to $300bn worth of debt to repay with reputable hedge funds and banks heavily invested in the Chinese firm.

Broader risk sentiment also remained under pressure yesterday as investors prepared for this week’s Federal Reserve and Bank of England (BoE) interest rate decision.

First up will be the Federal Reserve (Fed) interest rate decision which takes place this evening. Whilst interest rates are expected to be kept unchanged, the Fed may hint on its dot plot graph when the next hike is expected as well as announcing a tapering of its current asset purchasing programme. Any indication that either is set to occur sooner than markets are currently forecasting will force the dollar to fresh highs. On the other hand, failure to bring forward rate hike or tapering expectations may place pressure on the dollar, as the Fed will ultimately be confirming that they still expect the recent spikes in data to be transitory.

On Thursday, it will be the BoE who take centre stage. Like the US, investors have already started pricing in a UK interest rate hike as early as 2022. There is an assumption that the bank may be set to start winding down its own asset purchasing programme (the process before raising interest rates). A likely hawkish BoE tilt at this month’s meeting has already been reflected in the price in recent weeks and was a contributor for sterling trading close to recent highs. Despite stronger inflation and resilient jobs data, retail sales have fallen below expectations which led to sterling retreating somewhat. Any indication that policymakers are now pushing for a tightening of policy in comments or votes may boost sterling from current lows.

Key announcements

15:30 – USD – Existing home sales (Aug) expected to fall from 5.99m to 5.89m
19:00 – USD – FOMC interest rate decision