Sterling’s Decline Deepens as Risk-Off Mode Takes Hold

Sterling weekened notably in the first week of 2016, closing in on its lowest level against the dollar in five years as global stock markets slumped once again.

GBP/USD traded as low as 1.4560, a key level of support which saw buying interest in sterling and the pair bounce back to 1.46.

It also fell to 1.3420 against the euro – its lowest since October.

Sterling’s decline against a rising US Dollar has been accelerated by the risk-off mode this week that has investors seeking refuge in safe haven currencies including the US Dollar, Japanese Yen and the Swiss Franc.

That can almost entirely be attributed to the Chinese central bank allowing its currency to weaken to its lowest level against the dollar in almost five years, fuelling speculation that the economy is slowing faster than official figures suggest.

Concerns over a Brexit and reduced bets that the Bank of England will hike rates any time soon have also weighed on Sterling.

The Bank of England and the Chancellor have been quite vocal about risks facing the UK economy this year and the early signs are that China’s economy is weakening further, putting a bigger question mark over global growth.

Data this week continued to point to a softening in UK economic activity at the end of last year, with optimism in the dominant service sector falling to its lowest in three years.

There are a number of emerging market economies either in recession or on the brink of it and growth in the US, UK and Eurozone looks far from robust.

The end of the commodity boom that delivered so much growth and prosperity to parts of the world, could make 2016 a very tough year as demand from China continues to weaken.

Currency markets are on alert for another bumpy year with a number of countries seeing devaluation of their currencies as a way of protecting their economies from the storm that’s brewing.