After a strong performance against the euro and dollar recently, the pound has taken a sharp downturn. This decline followed a Bank of England interest rate cut and a dramatic stock sell-off that wiped out trillions in market value within just a few days.

At the end of July, the Bank of Japan surprised markets by announcing plans to raise interest rates to 0.25%. For years, Japan had kept interest rates in the negative to stimulate its stagnating economy. This unexpected move caused the yen to strengthen against most currencies, reversing recent losses where GBP/JPY had hit its highest levels since 2008.

As a result, traders who had used yen for carry trades began pulling out of their investments and repaying the yen loans. This shift, combined with concerns about a potential economic slowdown in the US and a drop in share prices of major US tech stocks – the “magnificent seven” – put additional pressure on the pound.

GBP/EUR had been trading near a two-year high, breaking out of the 1.1450-1.1750 range that had been steady for much of the previous year. Similarly, GBP/USD was trading above the key level of 1.30. However, both have now dropped back into their previous ranges.

The Bank of England’s Monetary Policy Committee recently voted 5-4 in favour of cutting interest rates for the first time since the onset of COVID-19 in the UK, over four years ago. Another rate cut is expected later this year and all eyes are now on the US Federal Reserve to see how its next move will influence GBP/USD.

At the tail end of August however, the picture is looking less certain for the US economy. GBP/USD has managed to flip the reversal of the Japanese carry trade sell off and shot passed the previous mark. Trading near the 1.31 mark at the time of writing, cable is fast approaching over a 2 year high.