**Sterling Slides to 1.3420 as US Shutdown Fears Drive Dollar Surge**
*Based on reporting by Steve Franklin, TradingNews.com*
The British pound came under strong selling pressure on Friday, slumping sharply to a multi-week low of 1.3420 against the US dollar. Market sentiment has turned risk-averse amid renewed fears of a US government shutdown, a scenario that has propelled the safe-haven greenback to fresh highs against most major currencies. As global uncertainty mounts, foreign exchange markets are witnessing heightened volatility and recalibrated expectations for monetary policy, economic growth, and risk sentiment.
Below is an in-depth analysis of the causes behind the pound’s slide, the mechanics of the current forex market environment, and the outlook for both the sterling and the greenback in the coming weeks.
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### US Government Shutdown Looms
At the heart of the recent forex turbulence lies the potential for a partial US government shutdown. The latest negotiations in Washington have shown little progress toward averting a lapse in federal funding, raising concerns on Wall Street and in global markets.
– **Congressional Stalemate:** Disagreements between House and Senate leaders, mainly over discretionary spending and policy amendments, have made a last-minute funding deal appear unlikely.
– **Historical Impact:** While US government shutdowns typically have limited long-term effects on the domestic economy, they tend to exacerbate short-term market volatility. In the past, the dollar has sometimes attracted safe-haven flows during periods of institutional uncertainty.
– **Market Reaction:** Investors, seeking to manage risk, have rotated out of high-beta assets and emerging market currencies into the US dollar, viewing it as the world’s most liquid and stable currency during crises.
This macro backdrop has underscored the market’s current trading bias, with the dollar benefiting from geopolitical tension and political uncertainty in the world’s largest economy.
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### Dollar Index Hits Multi-Month Highs
The US Dollar Index (DXY), which measures the greenback against a basket of six major peers, surged to its highest level since November. The index rallied beyond 104.20, boosted by recession fears in Europe and a flight to quality by global investors.
– **Key Support for Dollar:**
– Safe-haven demand due to global political risk
– Relative economic resilience of the United States compared to rivals such as the Eurozone or United Kingdom
– Continued outperformance in US employment and consumer data, furthering the narrative of a strong US economy
– **Federal Reserve Stance:** Although the Federal Reserve has paused its rate-hiking campaign, Chair Jerome Powell has signaled a willingness to keep policy restrictive. This underpins higher US yields, attracting foreign investment and boosting the greenback.
– **Yield Differential:** US Treasury yields, especially in the 2-year and 10-year segments, remain at or near cycle highs, incentivizing carry trades that favor the dollar over lower yielding currencies.
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### Pound Sterling: Vulnerability Exposed
Amid the global risk-off tone, the British pound led the move lower among G10 currencies. The slide to 1.3420 versus the dollar reflects both global dynamics and a weak domestic outlook for the UK.
– **Domestic Headwinds for Sterling:**
– **Weak Economic Data:** The UK economy continues to struggle, with sluggish GDP figures, rising unemployment, and stubborn inflation at a time when real wage growth has barely kept pace.
– **Bank of England Signals:** The BoE recently struck a more cautious tone, indicating that interest rate hikes may be nearing an end. This shift, combined with skepticism over the sustainability of the UK’s economic recovery, has pulled capital out of GBP-denominated assets.
– **Political Uncertainties:** Internal Conservative Party divisions, persistent Brexit aftershocks, and negative sentiment around political stability have weighed further on the pound.
– **Technical Breakdown:**
– The break below the 1.3500 support area triggered
Read more on GBP/USD trading.