The risk-sensitive pound was tripped up by weak Chinese data on Monday having recovered from a fresh two-year low at the end of last week.
Waning investor confidence was compounded by reduced bets on the pace of Bank of England (BoE) rate hikes this year.
In April, money markets were pricing in around 144 basis points (bps) of BoE rate hikes by year-end, which has recently been scaled back to 133 bps.
An inflated interest rate outlook typically boosts the value of a currency but with UK recession risks surfacing, investors are reassessing their view on how the BoE might act to rein in rising inflation.
The embattled UK currency has dropped 10% against the dollar so far this year amid a barrage of headwinds that have hit risk sentiment: the war in Ukraine, soaring inflation, weakening domestic economic growth and fears for a slowdown in the global economy.
Choppy conditions on Monday morning saw the pound drop deeper into the 1.22 range – not far off a two-year low of 1.2156 hit on Friday.
Fed Williams underscores the need to tame inflation
While the pound found itself at the sharp end of reduced risk sentiment in markets, the safe-haven dollar used it to consolidate its gains on Monday.
Federal Reserve Bank of New York President John Williams said that tackling sky-high inflation – which he expects to come down significantly next year – is the US central bank’s priority.
Speaking on Monday, Williams said that events in China and the war in Ukraine have prompted recent market volatility.
He believes plans to reduce the size of the balance sheet are impacting longer-term interest rates, noting that we are experiencing a tightening of monetary policy akin to that seen in 1994. Nonetheless, the Fed must restore real interest rates to zero, he added.
Williams’ comments came ahead of a speaking engagement from Fed Chair Jerome Powell on Tuesday, which will be closely watched.
On Tuesday, the UK jobs report is expected to show the domestic unemployment rate held steady at 3.8% in March, below pre-pandemic levels. The UK claimant count change for April – which reflects jobless claims – is forecast to drop by 38,800.
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