Pound Struggles Amid Social Unrest; Dollar and Euro React to Economic Signals.

• Pound Struggles: The British Pound was the worst-performing major currency on Tuesday, impacted by social unrest and a struggling FTSE 100, with GBP/USD hitting 1-month lows before slightly recovering.
• US Dollar Mixed: The US Dollar strengthened against the Pound but traded within a wide range against other currencies. Recession fears lingered despite reassurances from the Federal Reserve, partially capping gains.
• Euro as Safe Haven: EUR/USD increased by 0.89% this month, benefiting from the US Dollar’s lost safe-haven appeal amid falling yields. The Yen and Swiss Franc also saw gains, disrupting the carry trade.
• Economic Data Impact: Strong German factory orders supported the Euro, while disappointing US trade balance data and a weak nonfarm payrolls report weighed on the Dollar.
• Market Volatility: Elevated volatility persisted due to margin calls and reassessments of economic outlooks, leading to cautious investor sentiment and fluctuating currency values.

GBP: Pound on the Defensive The British Pound remained under pressure on Tuesday, unable to capitalize on slightly more stable market conditions. The UK currency ended the day as the worst-performing major currency, with the FTSE 100 index failing to hold onto early gains, which weighed on market sentiment. Scotiabank noted, “At the margin, images of widespread social unrest across the UK over the past week could be weighing on sentiment.” Elevated volatility persisted, influenced by significant margin calls. Amid a stronger dollar, the Pound to Dollar (GBP/USD) exchange rate dropped to 1-month lows at 1.2680 before inching up to 1.2695. Scotiabank further mentioned, “A retest of the late June lows around 1.2610/15 looks likely at this rate.” German data exceeded expectations, with factory orders rising by 3.9% in June against an anticipated 0.4% increase, which lent some support to the Euro. Consequently, the Pound to Euro (GBP/EUR) exchange rate traded just below 1.1640, near 1-month lows. Following Monday’s panic over heightened US recession fears, Tuesday saw a more tempered reassessment of the US economic outlook.

USD: Dollar Firms Against Pound, Faces Mixed Signals The US Dollar strengthened against the Pound on Tuesday but experienced a wide trading range against other currencies as recession fears lingered. Federal Reserve Bank of Chicago President Austan Goolsbee’s reassuring comments mitigated some concerns, though markets remained wary of last Friday’s disappointing nonfarm payrolls report, which continued to cap gains. Goolsbee advised not to overreact to one month’s data, citing potential margin of error. Despite partial expectations of a 50bps rate cut from the Federal Reserve in September, which weighed on USD sentiment, concerns over economic stability also affected investor confidence in currencies other than the Dollar. The risk-off sentiment supported the Dollar in various exchange rates. Additionally, lingering positive effects from Monday’s ISM services PMI, which exceeded expectations at 51.8, provided some support. However, the US trade balance report on Tuesday fell short of expectations, with the trade deficit reducing to $-73.1bn compared to the forecasted $-72.5bn. While exports of US goods increased, service exports declined due to reduced travel demand.

EUR: Euro Gains Safe Haven Appeal EUR/USD rose by 0.89% this month, establishing itself as a safe haven while the US Dollar faltered amid rapidly falling yields. Other safe haven currencies, such as the Yen and the Swiss Franc, performed even better, with the Yen rising 3.81% against the USD in August, disrupting the carry trade. ING noted, “The key takeaway at this stage is that the dollar has lost its safe-haven appeal. That is because soft US data was behind the market turmoil, and investors are now reluctant to price in aggressive Fed easing as a reaction, which is a dollar negative and highly favors the other safe-havens JPY and CHF.” Monday’s volatile trading saw the rate differentials between the EU and US narrow to just –71bps before returning to –100bps, briefly pushing EUR/USD above 1.10 before settling around 1.09, a level it has maintained for months. The retracement was partly due to a rebound in the USD as global markets stabilized, recognizing that much of Monday’s panic was an overreaction. The shift from expecting 2-3 rate cuts to nearly 5 this year seemed excessive given the weak jobs report catalyst. Upcoming data might improve, potentially easing unemployment concerns. Additional pressure on EUR/USD came from weak EU data, with retail sales declining by 0.3% in June and consumer spending remaining subdued. While Q2 GDP showed patchy growth, driven by Spain, the outlook for Q3 remains lukewarm, with forward-looking PMIs and sentiment surveys indicating sluggish activity. The EU economy is stable, but a robust recovery remains elusive.