Sterling traded lower on Friday alongside the euro, as a broad global equity pullback driven by higher oil prices and renewed AI-related worries dented risk appetite and shifted flows toward the yen and Swiss franc. The dollar, in this environment, did not act as the primary safe-haven destination.
At 05:28 ET (09:20 GMT), sterling was down 0.10% against the dollar at $1.3375, while the euro traded 0.21% lower at $1.1193. Market participants noted the greenback's vulnerability to the prevailing AI narrative and observed a defensive rotation into the yen and Swiss franc.
"FX moves confirmed that the dollar is far from the preferred safe haven at this stage, with the yen and Swiss franc emerging as the main beneficiaries of the defensive rotation," Francesco Pesole, FX strategist at ING, said in a note.
Pesole framed the price action in terms of bond-equity interplay, adding that "the negative correlation between bonds and equities is reasserting itself, and FX markets are taking their cues from that dynamic." In fixed income, ten-year Treasury yields fell back below 5.0% for the first time in a month, while the two-year SOFR swap rate dropped 15 basis points to 4.50%.
Those moves in sovereign rates, together with equity market jitters, have implications for expectations around monetary policy. Pesole said that while current equity turbulence is enough to weaken conviction in an extended Federal Reserve tightening cycle, "the bar for pricing out a December Fed hike appears fairly high," a factor that should constrain more pronounced dollar declines.
Domestically, UK retail sales volumes provided a softer datapoint ahead of the weekend. Office for National Statistics figures showed retail sales fell 0.4% month-on-month in September, compared with a forecast 0.1% decline. August retail sales were revised up to a 0.7% rise, but annual growth slowed to 0.8% from 2.7%, below the expected 1%.
Analysts said the mixed retail numbers may have exerted some downward pressure on the pound, but sterling’s smaller move versus the euro suggests the data was not the dominant driver of currency action on the session.
Across European sovereign markets, spreads displayed notable movement. The OAT-Bund 10-year spread closed at 174 basis points after touching 178 basis points, while the OAT-BTP spread reached 50 basis points.
Pesole warned that the euro's earlier sensitivity to developments in France "has clearly diminished," but cautioned that the connection "may, however, re-establish very rapidly" if a new pain threshold - perhaps around 200 basis points - is breached.
Against that backdrop, ING flagged the potential for EUR/USD to revisit its 14 October low at 1.1120 should bond market turmoil continue, and described EUR/CHF as the "cleanest way to play European sovereign risk." The firm did not provide a timetable or explicit sterling targets.
In summary, a mixture of higher oil prices, AI-linked risk concerns and shifts in bond yields drove a defensive rotation in FX markets, lifting the yen and Swiss franc while leaving sterling and the euro under pressure. A stabilization in risk sentiment would, according to ING, allow the dollar to consolidate and could remove some of the recent support for the yen and franc.
Key points
- Sterling weakened modestly to $1.3375 while the euro fell to $1.1193 as markets moved into safer currencies.
- Yen and Swiss franc benefited from a defensive rotation as equities reacted to higher oil prices and AI concerns; the dollar lost some safe-haven appeal.
- Sovereign yields and spreads shifted: U.S. ten-year yields fell below 5.0% and two-year SOFR swaps dropped to 4.50%, while European spreads such as the OAT-Bund and OAT-BTP widened.
Risks and uncertainties
- Continued equity market stress could sustain demand for defensive currencies, keeping pressure on sterling and the euro and affecting export-sensitive sectors.
- Further bond-market dislocation in Europe - for example, a re-widening of OAT-Bund spreads toward the 200 basis point area - could rapidly re-link the euro to France-specific sovereign risks and strain financial markets.
- Monetary policy expectations remain a source of uncertainty: while equity weakness may dampen conviction in the Fed's tightening path, ING notes that the market still places a high bar on ruling out a December hike, which limits the scope for a large dollar sell-off.