Opportunities Emerge as Sterling Stumbles.

• Sterling Opportunity: Pound Sterling has fallen sharply against major currencies, presenting a potential buying opportunity, especially against the Euro and Swiss Franc, according to Barclays strategists.
• Interest Rate Impact: The decline in GBP is driven by a dovish shift in Bank of England interest rate expectations, global market turmoil, and disappointing US economic data.
• US Dollar Recovers: The USD regained some ground due to better-than-expected jobless claims data, though expectations of future rate cuts by the Federal Reserve limited its gains.
• Euro Struggles: The Euro weakened midweek, impacted by a disappointing German trade balance and a shift towards risk-on sentiment in the markets.
• Outlook: Strategists suggest that once market volatility decreases, better levels for buying GBP against EUR and CHF will emerge, supported by resilient demand and a cautious Bank of England rate-cutting approach.

GBP: The Pound Sterling has recently experienced a sharp decline against all major currencies, but according to Barclays strategists, this dip presents a buying opportunity, particularly against the Euro and the safe-haven Swiss Franc. In July, Sterling became the largest net long position in the speculative market, with bets on the British currency reaching record levels. However, much of the gains from the second quarter have been wiped out over the past week. This decline is largely due to a dovish shift in expectations for Bank of England interest rates, a global stock market meltdown, and disappointing US economic data, which has led to increased confidence that US interest rates will be cut multiple times this year. Barclays strategists suggest that once the modest long positioning clears and market volatility decreases, investors will find better opportunities to buy into Sterling, especially against the Euro and Swiss Franc. They note that resilient demand, a likely slow rate-cutting cycle by the Bank of England, and potential supply-side improvements through a closer EU-UK relationship continue to support a positive outlook for GBP.

USD: At the time of writing, GBP/USD is trading at $1.2697, nearly unchanged from Thursday’s opening rate. The US Dollar (USD) managed to recover some of its recent losses on Thursday, buoyed by stronger-than-expected jobs data. Although the USD’s gains were somewhat limited, it was supported by a larger-than-expected drop in initial jobless claims, with the number of Americans filing for unemployment benefits falling to 233,000 for the week ending 3 August, below market expectations of 240,000. This decline came after an upward revision of the previous week’s figure to 250,000. Following last week’s weak US employment data, signs of a stronger labor market helped keep the USD afloat. Joe Brusuelas, Chief Economist for RSM US LLP, commented on X: “Big drop in initial jobless claims to 233K. Anything in that range tends to suggest a fairly healthy labor market.” Despite a major selloff earlier in the week due to US recession fears, the USD ended the week quietly. However, expectations that the Federal Reserve will begin an aggressive monetary unwinding cycle next month kept additional pressure on USD exchange rates, preventing a robust rebound.

EUR: At the time of writing, GBP/EUR is trading at €1.1633, recovering from early morning losses. The Euro struggled midweek, weighed down by a disappointing German trade balance and a risk-on sentiment in the markets. Germany’s trade balance revealed a sharper-than-expected fall, dropping from €25.3bn in May to €20.4bn in June, marking the smallest surplus since October. The decline was attributed to weaker demand for German goods from the US. The IFO Institute noted that the order shortage in Germany has worsened, posing a significant challenge for the economy. Although industrial production in Germany exceeded expectations with a 1.4% rise (above the 1% forecast), it wasn’t enough to offset the Euro’s headwinds, which intensified as risk appetite returned to the markets. While the Euro is generally preferred over currencies like the Pound (GBP) or the Australian Dollar (AUD) during times of risk aversion, increased risk appetite led to a decline in demand for the Euro. Even the relative weakness of the US Dollar couldn’t boost the single currency, despite its strong negative correlation with the USD, which typically sees the Euro rise when the Dollar falls.