Sterling outlook risks remain high

FX markets still appear to be pricing in a possible soft landing for the U.S. economy, but the U.K. could face the risk of a hard landing. Commerzbank economists expect the pound to struggle to rise. The Bank of England said on August 4 that it expected a more prolonged recession in the UK from the end of this year. Rising energy costs are a key reason why the Bank of England has sharply raised its inflation forecast. Of course, the Bank of England also wants to keep inflation under control. However, everything depends on how Europe's energy crisis develops. But the BoE's (rate hike) course is not set in stone, so downside risks to the pound remain high.

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Sterling, already weighed down by poor economic and public financial health, faces a new storm as the front-runner for Britain's next prime minister proposes changes to the central bank's mandate. Foreign Secretary Truss, who is leading the race to become Britain's next prime minister, has further called for a review of the Bank of England's mandate and raised the possibility of setting a new money supply target.

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British Prime Minister Jensen has held talks with energy companies to discuss how they plan to use their lucrative profits and explore ways to help British households cope with the soaring cost of living. The Treasury Department said the market did not always serve consumers and that excessive energy bills would ultimately hurt energy companies. The meeting comes amid mounting pressure on Truss and Sunak to detail how they will help households cope once the energy price cap is raised in October. The government is reviewing each of their proposals on subsistence allowances and energy policy so officials can roll out the measures quickly when one of them takes office on Sept. 6, according to people familiar with the matter.

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Risk currencies such as the pound and the Australian dollar followed global stock markets and rose against the euro and the dollar as investors tempered expectations for a rate hike by the Federal Reserve. If sentiment remains supported throughout August, GBP/USD and EUR/EUR could extend gains due to being in a "high beta" state. Business activity has also improved, with workers more likely to report their workplaces are busier than last month and more likely to expect to be busier in the future. The next domestic event crucial for the pound will be the UK's second-quarter GDP figures on Friday, with markets expected to contract.

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The Fed remains committed to raising interest rates, and energy supply issues in Europe remain a headwind for the euro. ING analyst Chris Turner said in a research note that weaker-than-expected U.S. inflation data triggered a drop in the dollar, but the losses won't last as Fed officials have reiterated their plans to raise interest rates further; Rhine Drought conditions and low water levels in the U.S. will challenge coal shipments and other cargoes, keeping European gas prices high. This factor remains an outright bearish for the euro. 1.0350-1.040 may prove to be the top of the August trading range in Europe and the US.