Sterling’s decline against the US Dollar continued on Tuesday, dipping to a five-week low, whilst it was steady against the Euro as markets calmed following the swings on Monday.
At the time of writing the Pound was down 0.6% against the greenback at $1.2699, a low not seen since 3rd July.
It has dropped around 2.6% from its mid-July high, just above $1.30, as traders reduced their long positions ahead of the Bank of England's rate cut last week.
The Sterling-Dollar rate has been less impacted by recent market turmoil compared to other currency pairs, Reuters reports.
This is because the Pound's sensitivity to fluctuations in assets like equities offset changes in the relative rate outlook, according to UBS Global Wealth Management currency strategist, Patrick Ernst.
Markets have significantly raised their expectations for Federal Reserve rate cuts and now anticipate over 100 basis points of easing at the Fed's three meetings this year.
In contrast, they expect less than 50 basis points of additional cuts from the Bank of England.
This change in rate differentials would usually support the Pound. However, being a high beta currency that typically follows broader market trends, it came under pressure from the sharp equity sell-off over the past two trading days.
Sterling also weakened slightly against the Euro, with one Euro at 85.9 pence, though it was more stable than Monday.
Indeed, the single currency surged to 86.19 pence on Monday, its highest level since early May.
This was down to a series of safe-haven flows shifting to the Euro from the Dollar, due to the turmoil in the US.
Furthermore, against the Japanese Yen, which has been the biggest mover in currency markets in recent weeks, the Pound fell 0.24% to 183 Yen, marking its sixth consecutive day of declines, due to the unwinding of carry trades, which has bolstered the Japanese currency.
However, the longer-term prospects for Sterling still hinge on rate differentials.
“We believe that resistance levels around 1.30 will hold in the short term and that they will only be broken later in the year when Fed cuts are underway and the USD weakens more broadly,” Ernst added.