British Pound Weaker Against the Dollar as Recession Worries Mount

The British pound fell from a three-week high of 1.2090 against the dollar in the Asian session on Tuesday, after the US dollar racked significant strength from rising safe-haven demand on recession worries. Sterling also suffered additional pressure from the ongoing political crisis in the UK.

The pound lost against the dollar despite broad expectations of 50 basis points (bps) prime lending rate hike by the Bank of England (BoE) in its upcoming policy meeting in August. However, with the backdrop of a worsening economic outlook, many believe the bank might be modest on its rate hike and keep it to a minimal 25 bps increase. Regardless, it remains uncertain what the BoE is likely to do at this time.

A strategist at ING Bank, Francesco Pesole, explained: “BoE is priced for tightening like the Fed but with a far worse economic outlook than the United States.” Pesole added: “The worsening economic outlook will push the BOE to hold a less hawkish stance.”

British Pound Retains Strength Over Other Currencies

At press time, the GBP/USD pair struggles to hold the 1.2000 mark after plunging to the 1.1963 low earlier today. Against the euro, the pound extended its gains to its July 13 high. Currently, the EUR/GBP trades at 0.8412 or -0.82%.

Meanwhile, the latest positioning data shows investors have concentrated their bearish bets on the Sterling to $4.3 billion just below its two-year peak of $6.2 billion recorded in May.

Finally, the market mood remained cautious ahead of the two-day US Federal Reserve (FOMC) policy decision on Wednesday. At this meeting, Fed policymakers are expected to increase rates by an additional 75 basis points.