Pound declines versus the US dollar to around 1.2700 as risk-sensitive currencies lose appeal.

The Pound Sterling (GBP) falls to roughly 1.2700 against the US Dollar (USD) in Tuesday’s London session. The GBPUSD pair falls as the US Dollar holds steady after recovering from a six-month low. The US Dollar Index (DXY), which measures the greenback’s value against six major currencies, has recovered to near 103.00.

The outlook for the US Dollar remains weak as market investors are concerned about mounting speculation of a recession in the United States (US) and an announcement of The Federal Reserve (Fed) implemented emergency rate cuts.

Investors are concerned that the US economy could enter a recession.

Following a spate of dismal US economic data, market expectations of a possible recession increased. The unemployment rate increased to 4.3%, the highest level since November 2021, labor demand decreased, and the Manufacturing Purchasing Managers Index (PMI) dropped quicker in July. However, an economy is deemed in a technical recession if its Gross Domestic Product (GDP) drops consecutively for two quarters, which appears to be the contrary in the US situation, given that the economy expanded at a rate of 2.8% on an annualized basis in Q2. The US economy grew twice as fast as it did in January-March.
Also, the US Services PMI, which factors for Two-thirds of the economy grew at a quicker rate in July after declining in June. According to the PMI survey, service sector activity increased at a faster-than-expected rate of 51.4 percent. Investors expected the Services PMI to rise to 51.0 from 48.8, as previously reported.

Daily Market movers: Pound Sterling underperforms against major currencies.

The pound sterling remains weak against its major counterparts, but it performs well against the Japanese yen (JPY) and the Swiss franc (CHF), which both saw profit-booking on Tuesday. The British pound remains under pressure from widespread risk aversion.
Aside from fears of a US recession, the prospect of an all out war between Israel and Iran has kept risk sentiment on edge. Fears about escalation Middle East disputes erupted as Iran-backed Hezbollah said it fired dozens of missiles toward Israel on Saturday in response for the killing of Hamas leader Ismail Haniyeh by an Israeli bombing near Tehran.

Market anticipation over BoE rate cuts will drive the British pound downward.

On the domestic front, the Pound Sterling will be influenced by market speculation about the Bank of England (BoE) in the absence of major events. Market participants anticipate that the BoE would slash interest rates again in order to combat the ripple effects of the US economic slump.
Last week, the BoE decreased interest rates by 25 basis points (bps) to 5% in a 5-4 decision, as expected. The BoE indicated that it will proceed cautiously with its policy normalization process.