Pound Sterling Highly Exposed to a Market Correction

Economic

Summary:

The British Pound faces significant downside risks in the event of a shift to risk-off sentiment in global markets, according to a research note from BNP Paribas.

The bank identifies Pound Sterling as one of the most vulnerable currencies among G10 peers, driven by structural weaknesses and heightened sensitivity to investor risk appetite.

"Currently, this yields NZD and GBP as most sensitive to risk-off, while the JPY and CHF could outperform in the G10," says Joshua Wilcock, FX Strategist at BNP Paribas.

BNP Paribas highlights that the Pound's elevated carry status has increased its exposure to equity market fluctuations, making it more sensitive to deteriorating global risk conditions.

The warning comes at a time of risk-on market conditions consistent with an ongoing bull market in stocks, which have facilitated GBP exchange rate gains.

This week's setback in the Pound-to-Euro exchange rate recovery is consistent with a decline in the U.S. S&P 500 index, which is taken as a proxy for global investor sentiment.

Pound Sterling Highly Exposed to a Market Correction_1

Above: GBPEUR (top) and the U.S. S&P 500 index.

The decline has been relatively shallow, but the sensitivity confirms the Pound's vulnerabilities to wider sentiment and losses would be far more significant in a bigger market correction.

"The GBP stands out in the screen as it suggests scope for a change in behaviour, having become one of the high yielders in G10," says Wilcock. "For the GBP, vulnerabilities are revealed consistently across the variables."

One vulnerability is the UK’s worsening net international investment position (NIIP) and persistent current account deficit have left the currency reliant on foreign capital inflows.

"The persistent current account deficit and wide fiscal deficit has created a reliance on foreign investor inflows," explains Wilcock.

The research also underscores sterling’s vulnerability to a broader economic slowdown alongside emerging market high-yielders such as the Brazilian real and the Hungarian forint.

BNP Paribas says this leaves the path for GBP outperformance "a narrow one considering uncertainties around global trade and financial conditions."

"For the GBP, with this sensitivity to risk-off we still think the GBP may be underhedged for GBP downside, so we position for this via a 1.15 GBPUSD digital put," says Wilcock.

In contrast, the Japanese yen and Swiss franc are expected to outperform in risk-off conditions due to their safe-haven status.

Source: Poundstrerlinglive

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Warren Takunda

Economic

Donald Trump on Tuesday opened yet another front in his assault on global trade norms, ordering a new investigation into possible tariffs on copper imports to rebuild US production of a metal critical to electric vehicles, military hardware, semiconductors and a wide range of consumer goods.

Trump, looking to thwart what his advisers see as a move by China to dominate the global copper market, signed an order directing commerce secretary Howard Lutnick to start a new national security investigation under Section 232 of the Trade Expansion Act of 1962, the same law that Trump used in his first term to impose 25% global tariffs on steel and aluminum.

A White House official said any potential tariff rate would be determined by the investigation, adding that Trump preferred tariffs over quotas.

The White House trade adviser Peter Navarro said the investigation would be completed quickly, “in Trump time”.

Navarro claimed China was using state subsidies and economic influence to gain control over global copper production, in much the same way it now dominates steel and aluminum production.

That said, the countries set to be most affected by any new US copper tariffs would be Chile, Canada and Mexico, which were the top suppliers of refined copper and copper articles in 2024, according to US Census Bureau data.

“Like our steel and aluminum industries, our great American copper industry has been decimated by global actors attacking our domestic production,” Lutnick, the US commerce secretary, said in a statement. “To build back our copper industry, I will investigate the imposition of possible tariffs.“

Lutnick said US industries and national defense depended on copper and “it should be made in America, no exemptions, no exceptions”.

“It’s time for copper to come home,” Lutnick added.

The White House official said the investigation would look at imports of raw mined copper, copper concentrates, copper alloy, scrap copper and derivative products made from the metal. The official declined to identify any specific derivatives, saying that would prejudge the investigation.

The official added that the Department of Energy recognized copper as a critical material in the medium term due to increased demand for solar energy technologies and global electrification, noting that it was the second most widely used material in US weapons platforms.

The official said based on current demand for electric vehicles and power-hungry artificial intelligence applications, there will be a US copper shortage in the future, and the US cannot develop adequate copper smelting and refining capacity unless there is a reasonable certainty of long-lasting trade protection for the sector.

The move is the latest effort by Trump to build a tariff wall around the nation’s economy as part of his drive to rebuild a long-declining US manufacturing base and redraw decades of trade relationships.

Trump said on Monday that separate 25% general tariffs on imports from Mexico and Canada were “on schedule” ahead of a 4 March implementation deadline despite efforts by both to avoid them by securing their US borders and halting the flow of fentanyl, the deadly opioid.

Source: Theguardian

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Warren Takunda

Stocks

U.S. Treasury yields regained some lost ground on Wednesday after the House of Representatives advanced President Donald Trump's tax-cut agenda, while the dollar and oil prices struggled on mounting worries over U.S. growth.

U.S. stock futures rebounded after a mixed session on Wall Street, with Nasdaq futures rising 0.6%, while S&P 500 futures gained 0.4%.

EUROSTOXX 50 futures similarly edged 0.66% higher, while FTSE futures tacked on 0.7%. DAX futures jumped 0.84%.

U.S. copper prices surged more than 4% while those elsewhere fell overnight after Trump on Tuesday ordered a probe into potential new tariffs on copper imports.

The Republican-controlled U.S. House of Representatives late on Tuesday narrowly passed Trump's $4.5 trillion tax-cut plan, sending the budget resolution to the Senate, where Republicans are expected to take it up.

U.S. Treasury yields advanced on the news as investors anticipate more debt issuance ahead, with the benchmark 10-year yield rising 3 basis points to 4.3289%.

The two-year yield similarly rose about 3 bps to 4.1271%.

"(The plan) moved through just a little bit quicker than people were expecting," said Tony Sycamore, a market analyst at IG. "You can see the way that yields are moving, it certainly caught them off guard a little bit."

Yields had fallen to their lowest in months in the previous session as traders ramped up bets of more Federal Reserve rate cuts this year on growing concerns over the outlook for the world's largest economy.

Data on Tuesday showed U.S. consumer confidence deteriorated at its sharpest pace in 3-1/2 years in February - the latest in a string of surveys suggesting that businesses and consumers were becoming increasingly rattled by the Trump administration's policies

"We're not surprised that we're getting these weak consumer confidence numbers. What we are surprised about, though, is that we're getting them now, before consumers see the impact of tariffs," said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (CBA).

Fed funds futures now point to more than 50 bps of easing priced in by year-end, up from about 40 bps a week ago.

That in turn weighed on the dollar, particularly against the yen. The greenback slid to an over four-month low against the Japanese currency in the previous session.

It last traded 0.27% higher at 149.42 yen , thanks to the rebound in U.S. Treasury yields.

In other currencies, the euro eased 0.21% to $1.0491, but was not far from a one-month high. Sterling was similarly near a two-month top and last bought $1.2637.

"What we're seeing is the dollar weakens because of this soft economic data, but at some point, you hit a threshold where you get safe-haven flows into the U.S. dollar," said CBA's Capurso.

"So if things get really, really bad in America, let's say the market starts pricing in a recession or something close to a recession, the U.S. dollar always goes up."

Fears of slowing U.S. growth also cast a shadow over the outlook for oil demand.

Brent futures were up 0.25% to $73.20 a barrel having fallen more than 2% in the previous session, while U.S. West Texas Intermediate (WTI) crude <CLc1> rose 0.23% to $69.09 per barrel, reversing some of Tuesday's 2.5% slump.

Gold was little changed at $2,915.09 an ounce.

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AI poster child Nvidia reports its quarterly earnings later on Wednesday, which could offer clarity on demand and justify the sector's lofty valuations.

Investor scepticism has grown over the billions that U.S. tech firms have channelled into AI infrastructure due to slow payoffs and breakthroughs at China's DeepSeek.

"Any signs of weakness in Nvidia's report could have outsized effects on investor sentiment towards AI stocks as a whole," said Saxo's global head of investment strategy Jacob Falkencrone.

"This earnings report isn't just about Nvidia ... it's about whether the AI revolution can maintain its breakneck pace."

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan advanced 1.14%, helped by a rally in Chinese markets. Japan's Nikkei fell 0.4%.

Hong Kong's Hang Seng Index surged more than 3%, with the Hang Seng Tech index also rising 4.75%.

The CSI300 blue-chip index <.CSI300> edged 0.6% higher, while the Shanghai Composite Index gained 0.74%.

Chinese stocks have been on a tear over the past few weeks, driven by DeepSeek's AI breakthrough that reignited investor interest in China's technology capabilities.

However, the rally hit a speed bump earlier this week on news that the Trump administration plans to tighten semiconductor curbs on China and after the U.S. president signed a memorandum directing the Committee on Foreign Investment in the U.S. to restrict Chinese investments in strategic areas.

"It is recklessly complacent to brush off all tariff threats from the U.S. as a bluff that is meant as leverage," said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho.

"Especially not in China's case. Fact is, the U.S. intends to inflict significant industrial pain that compromises technological advantage and manufacturing clout or capacity."

Source: Reuters

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Warren Takunda

Economic

The ten-year U.S. bond yield has fallen below 4.4%, its lowest since December 12, and money markets show investors now see 54 basis points of easing from the Fed by the end of the year, compared to 48bp on Monday.

This means there are now two 25bp cuts expected this year, confirming investors think the U.S. economy is slowing. It also susggests they think the government's efforts to lower the country's debt will pay off.

Elon Musk's DOGE programme is snipping away at the deficit, which reached 6.4% of the GDP in 2024, but analysts say that the amounts being achieved so far are relatively small as a percentage of total expenditure.

However, DOGE's message is bigger than the actual cuts it delivers: that Trump is determined to lower the country's debt.

Deficits, Tariffs, and DOGE: Why the Dollar’s Strength Is Fading_1

Image courtesy of American Banker.

Trump's recent focus on bond yields and willingness to talk publicly about bringing down military spending signals that the government is determined to make significant inroads into America's balooning budget deficit.

If the government succeeds in shrinking the deficit, the Treasury will need to issue less debt (bonds). This means supply outstrips demand, driving up bond values and lowering their yield (or interest rate).

The Dollar has a positive relationship with bond yields, which explains why it is falling alongside the decline in Treasury bond yields:

Deficits, Tariffs, and DOGE: Why the Dollar’s Strength Is Fading_2

Above: USD/GBP tracks the U.S. ten-year bond yield lower.

It is clear yields are important for Trump. Treasury Secretary Scott Bessent said on February 06 that when Trump speaks of wanting lower interest rates, he is referring to the yield on the 10-year Treasury and not the short-term rate set by the Fed.

Musk also confirms the administration is highly focused on debt and yields, saying in a conversation hosted on X: "The bond markets do not currently reflect the savings that I'm confident we can achieve. If you're shorting bonds, I think you’re on the wrong side of the bet."

But DOGE is doing more than cutting spending, it is raising uncertainty and unemployment, which is slowing the economy and is deflationary.

For this reason, markets have recently adopted the view that DOGE's efforts are consistent with more Fed interest rate cuts, which will weigh on bond yields and the Dollar going forward.

Anna Wong, the chief U.S. Economist at Bloomberg Economics, says DOGE’s cuts will likely appear first in lower GDP growth as early as the second quarter, ahead of a sharp rise in the unemployment rate in the second half.

Markets are forward-looking, and the declining Dollar and bond yields show investors are preparing for this eventuality.

The Dollar was the best-performing major currency through the second half of 2024 as U.S. economic exceptionalism came to the fore with a solid run of above-consensus data releases.

However, Torsten Sløk, Chief Economist at Apollo Global Management, cautions that "the near-term downside risks to the economy and markets are growing."

Deficits, Tariffs, and DOGE: Why the Dollar’s Strength Is Fading_3

Above: There has been a noticeable deterioration in confidence in 2025, according to the Conference Board's confidence survey.

"The incoming data remains strong," Sløk said. "But we are starting to worry about the downside risks."

He explains that elevated policy uncertainty centred on the DOGE programme will begin to have a negative impact on capex spending and hiring decisions.

"Torsten Slok, who has been adamant and correct on the U.S. economy for a long time (bullish) is turning more cautious and I think that’s worth paying attention to," says Brent Donnelly, founder of Spectra Markets.

Can tariffs boost the Dollar? After all, Trump remains committed to them and the FX playbook says they are by their very nature inflationary, which is USD-supportive.

"The USD remains poised to capitalise if tariffs arrive," says Daragh Maher, Senior FX Strategist at HSBC.

However, markets are showing themselves to be increasingly less sensitive to tariff headlines than at the turn of the year, with the USD falling on the day Trump confirmed tariffs on Mexico and Canada were still likely to proceed on March 03.

The market reaction confirms that the deflation posed by DOGE and spending cuts are more relevant than the inflationary nature of tariffs.

Quite simply, fears of an economic slowdown outweigh any tariff-inspired inflation and tip the scales against the Dollar.

Source: Poundsterlinglive

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Alex

Forex

Australian Dollar (AUD) is expected to trade in a 0.6325/0.6365 range vs US Dollar (USD). In the longer run, upward momentum has largely faded; AUD is likely to consolidate between 0.6280 and 0.6410 for now, UOB Group's FX analysts Quek Ser Leang and Peter Chia note.

Upward momentum has largely faded

24-HOUR VIEW: "Yesterday, we detected 'a slight increase in downward momentum.' We expected AUD to 'edge lower,' but we indicated that 'any decline is unlikely to reach 0.6315.' Our view was correct, as AUD dipped to 0.6323, recovering to close largely unchanged at 0.6344 (-0.09%). The mild downward pressure has eased. Today, we expect AUD to trade in a 0.6325/0.6365 range."

1-3 WEEKS VIEW: "After holding a positive AUD view since early this month, we revised our view to neutral yesterday (25 Feb, spot at 0.6345). We pointed out that 'upward momentum has largely faded,' and we were of the view that AUD 'is likely to consolidate to between 0.6280 and 0.6410.' Our view remains unchanged."

Source: FXSTREET

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Alex

Economic

Chance for Euro (EUR) to rise above 1.0530 vs US Dollar (USD); it is unclear whether it can maintain a foothold above this level. In the longer run, c, but only a breach of 1.0425 would indicate that EUR is not ready to rise above 1.0530, UOB Group's FX analysts Quek Ser Leang and Peter Chia note.

EUR has a chance to rise above 1.0530

24-HOUR VIEW: "EUR rose briefly to 1.0528 on Monday and then pulled back. Yesterday (Tuesday), we pointed out, “the price movements did not result in any increase in either downward or upward momentum.” We expected EUR to “trade in a sideways range of 1.0440/1.0495.” However, after dipping to a low of 1.0455, EUR soared and closed near a 2-1/2-month high (1.0513, +0.45%). Despite the relatively strong advance, upward momentum has not increased much. While there is a chance for EUR to rise above the major resistance at 1.0530 today, it is unclear whether it can maintain a foothold above this level. The next major at 1.0560 is unlikely to come into view. To sustain the increasing momentum, EUR must not break below 1.0480, with minor support level at 1.0495.

1-3 WEEKS VIEW: "Yesterday (25 Feb, spot at 1.0460), we noted that 'upward momentum has slowed somewhat.' We highlighted that 'only a breach of 1.0425 (‘strong support’ level) would indicate that EUR is not ready to rise above 1.0530.' While EUR subsequently rose and closed higher by 0.45% at 1.0513, there is no change in our view for now. Looking ahead, EUR has to break and remain above 1.0530 before a move to 1.0560 can be expected."

Source: FXSTREET

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Alex

Economic

The Pound Sterling falls to near 1.2640 against the US Dollar as the Greenback rebounds on a decent recovery in US bond yields.

US Treasury yields bounce back as the US administration clears the $4.5 trillion tax cut plan.

BoE’s Dhingra sees more than four interest rate cuts this year.

The Pound Sterling (GBP) declines to near 1.2640 against the US Dollar (USD) in European trading hours on Wednesday. The GBP/USD pair faces selling pressure as the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, has shown a strong recovery move after sliding to near the 11-week low of 106.10 earlier in the day.

The Greenback bounces back strongly as bond yields gain ground after a five-day losing streak. 10-year US Treasury yields recover to near 4.33% after posting a fresh more than two-month low near 4.28% during the Asian session.

US bond yields find buyers’ interest after Republicans-controlled House of Representatives advances $4.5 trillion tax cut plan, which would also fund the deportation of migrants living in the US illegally, tighten border security, energy deregulation, and military spending, Reuters report. The injection of significant liquidity would boost inflationary pressures and force the Federal Reserve (Fed) to keep interest rates at their current levels for a prolonged period.

Meanwhile, traders have raised Fed dovish bets after weak flash United States (US) S&P Global PMI data for February showed on Friday that service sector activity contracted for the first time in over two years. According to the CME FedWatch tool, the possibility of the Fed cutting interest rates in June has increased to 65% from 47% a week ago. In the March and May policy meetings, the Fed is almost certain to keep borrowing rates steady in the range of 4.25%-4.50%.

Going forward, investors will focus on the US Durable Goods Orders and the Personal Consumption Expenditures Price Index (PCE) data for January, which will be released on Thursday and Friday, respectively. Investors will pay close attention to the US PCE inflation data as it will influence market speculation about the Fed’s monetary policy outlook.

Daily digest market movers: Pound Sterling consolidates against its major peers

The overall performance of the Pound Sterling against its major peers is sideways on Wednesday as investors digest dovish guidance from Bank of England (BoE) Monetary Policy Committee (MPC) member Swati Dhingra in her speech at Birkbeck on Monday. Dhingra warned about “weakness in consumption” and didn’t see it going away sooner, which is why she favored the unwinding of “monetary policy restriction”.

Traders have fully priced in two interest rate cuts by the BoE for the year. On the contrary, the commentary from Dhingra indicated that she favors more than four. "I know 'gradual' has been interpreted in the media as 25 basis points (bps) per quarter, but cutting interest rates at this pace for the remainder of 2025 would still leave monetary policy in an undesirable restrictive position at the end of the year,” Dhingra said.

In the policy meeting earlier this month, the BoE reduced borrowing rates by 25 bps to 4.5% and guided a gradual policy easing. The BoE also halved its Gross Domestic Product (GDP) forecast for the year to 0.75% and warned that price pressures could temporarily increase in the third quarter due to higher energy prices.

The outlook for the UK economy is uncertain due to potential tariffs from US President Donald Trump. Until now, Trump has imposed 10% tariffs on China and 25% on all steel and aluminum imports. He has also threatened to introduce reciprocal tariffs and 25% levies on all imports from Canada and Mexico, and he has proposed the same level of import duties on foreign cars, semiconductors, pharmaceuticals, and lumber and forest products.

Technical Analysis: Pound Sterling continues to face pressure near 200-day EMA

The Pound Sterling slides to near 1.2640 against the US Dollar in Wednesday’s European session. The GBP/USD pair continues to face pressure near the 200-day Exponential Moving Average (EMA), which stands at around 1.2680. The Cable holds above the 38.2% Fibonacci retracement from the end-September high to the mid-January low downtrend around 1.2620.

The 14-day Relative Strength Index (RSI) oscillates above 60.00. The bullish momentum remains intact if the RSI (14) holds above that level.

Looking down, the February 11 low of 1.2333 will act as a key support zone for the pair. On the upside, the 50% and 61.8% Fibonacci retracement at 1.2767 and 1.2927, respectively, will act as key resistance zones.

Source: FXSTREET

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Pound Sterling Highly Exposed to a Market Correction

Above: GBPEUR (top) and the U.S. S&P 500 index.

Source: Poundstrerlinglive

Donald Trump Orders New Tariff Investigation Into US Copper Imports

Source: Theguardian

Treasury Yields Rebound, Dollar Undermined by US Growth Worries

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Source: Reuters

Deficits, Tariffs, and DOGE: Why the Dollar’s Strength Is Fading

Image courtesy of American Banker.

Above: USD/GBP tracks the U.S. ten-year bond yield lower.

Above: There has been a noticeable deterioration in confidence in 2025, according to the Conference Board's confidence survey.

Source: Poundsterlinglive

AUD/USD: Expected to Trade in a 0.6325/0.6365 Range

Source: FXSTREET

EUR/USD: Upward Momentum Has Slowed Somewhat

Source: FXSTREET

Pound Sterling Weakens Against US Dollar as Trump’s Tax Agenda Advances

Source: FXSTREET

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