Sterling slides on rising rate and geo-political angst
GBP/USD tested 1-week lows near 1.33, and may move lower still as traders reassess the Fed's near-term rate cut trajectory after Chair Jerome Powell dialed back aggressive easing expectations and markets became risk averse in the face of escalating Middle East tensions.
The initial catalyst for the pound's recent fit of weakness came on Monday after Powell signaled smaller rate cuts in the near-term.
U.S. STIR futures markets had been discounting a slightly more than 50% chance that the Fed would follow September's 50bp cut with a similar sized move in November. Those odds have diminished slightly and recent GBP longs appear to reduced positions.
Reports that the United States has indications Iran is preparing to imminently launch a ballistic missile attack against Israel added a geopolitical element to trade that weighed on risk-sensitive sterling as investors sought safety in the dollar and U.S. Treasuries.
The pound could remain well-offered given interest rate and geopolitical risks but lack of a dramatic repricing of U.S. monetary policy expectations for November or out to December 2025 should temper the pound's decline.
A close below the daily conversion line at 1.3295 would put the pound on a path to 21- and 30-DMA support in the low 1.32s.
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GBP Chart: https://tmsnrt.rs/4gNN6Rh
(Paul Spirgel is a Reuters market analyst. The views expressed are his own)
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