Sterling recovered from a one-month low against a basket of currencies on Tuesday, helped by robust gains against the euro, but it underperformed the dollar as investors grew unsure about the timing of an expected rate rise by the Bank of England.
Money markets have pushed out the timing of when the BOE will raise rates to around the third quarter of next year compared with early 2016 when the central bank published its quarterly inflation report three weeks ago.
Fears of a slowdown intensified in recent days after China devalued its currency and data pointed to further signs of weakness. These factors have deepened a sell-off in Chinese stocks and triggered volatility in global stock markets.
China’s central bank responded with rate cuts and relaxation in reserve requirements on Tuesday, but given the sharp swings across asset classes and a highly uncertain global outlook, investors are questioning whether the Fed and the BoE can tighten policy in coming months.
“The weakness in emerging markets is now spreading to developed market outlook, questioning the scope of potential base rate lift-off over the coming months in the U.S. and the UK,” analysts at RBC Capital wrote in a note.