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Chamber Market Commentary - Sterling collapses as the market gets nervous over headwinds

GBP - Great British Pound
BoE Governor expects Pre-Pandemic level in early 2022
The pound has been hit by a perfect storm of negative drivers over the past few days that has seen it plummet against both the dollar and Euro.

The market’s confidence in the UK’s recovery has been shattered by the crisis that has seen wholesale gas prices continue to rise, causing the collapse of several providers. In addition, a continuing shortage of HGV drivers has led to scenes not seen for many years of drivers queuing to fill their tanks with fuel.

Traders are concerned that the UK’s recovery from the Pandemic will be blown off course by these new issues, especially since the wider shortage of raw materials and spare parts is still unresolved. Bank of England Governor Andrew Bailey is sticking to his mantra concerning inflation. Bailey believes that the rise in inflation in the UK is temporary, although he did acknowledge that the timing of GDP returning to pre-Pandemic levels has been pushed back by a month or two.

In a testament to how quickly the new twin crises have evolved, this view has only changed since the middle of August.

If there were to be a common denominator to the new issues facing the country, it would have to be Brexit.

The UK and France continue to squabble over fishing rights, which continues to be an evocative issue that carries far more weight than its contribution to either country’s economy.

Brexit has also brought about the shortage of lorry drivers, with those EU nationals who had to leave not keen to return on a short-term basis now that they have found jobs in their home countries and the UK is not offering sufficient incentive for them to return.

Sterling is also suffering at the hands of a stronger dollar which has pushed it through a series of supports and, technically, it now looks to lack buyers similarly to what affected the single currency earlier in the year.

Yesterday, the pound plummeted to a low of 1.3411 versus the dollar, closing at 1.3427. Against the euro, it was a similar story. It fell to a low of 1.1549 but as the euro began to see sellers emerge against the dollar, the pound recovered to close at 1.1578.

USD - United States Dollar
Powell acknowledges impending taper
Jerome Powell is preparing to fight for his own survival in the face of accusations that despite the relative success of his leadership of the FOMC during the Pandemic, he has been too soft on Governance of the financial sector.

He is under attack from a senior Democrat congresswoman, who has labelled Powell a dangerous person to be in charge of the Central Bank.

While this is little more than political rhetoric for now, the Chairman of the Fed is not going to be the shoo-in that he was expected to be.

While it was always unlikely to happen sooner, Philadelphia Fed President Patrick Harker spoke yesterday of his view that there will be no hike in rates until at least the end of next year or even the start of 2023.

This is a slightly more hawkish expectation that has been seen recently, with most commentators not even contemplating a rise at all in.

Jerome Powell, attending an ECB round table with Bank of Japan Governor Kuroda and the ECB’s President, commented that continued supply side pressures are holding back the economy.

He went on to say that the economy is close to where it needs to be for the Fed to begin to taper asset purchases, although he concurred with Harker’s view that interest rate rises are way off.

In accordance with common belief, Powell also said that forecasted for Q3 GDP had been lowered.

For some time, the dollar has been hampered by its own potential strength being filtered by the relative strength of the main components of the index. That has changed in recent days, with the euro and in particular Sterling weakening. This has led to an acceleration of the dollar’s move towards its medium-term target of 94.40.

Yesterday, it rose to a high of 94.43, closing at 94.36. It may now see a correction to what has been a rapid rise, but with momentum favouring the Greenback, a further rally cannot be ruled out.

EUR - Euro
Concerns over an overreaction to temporary inflation
ECB President Christine Lagarde finally believes what the market has been saying for some time, that the eurozone economy is different.

It is different in that every member of the Union gets a vote in changes to Monetary policy, the is no independent treasury that deals with fiscal policy, and it dances to the tune of both the more dovish and hawkish views of nineteen Central Banks, each of which has its own economic pressures to contend with.

Lagarde has separated herself from the move by other Central Banks towards tighter policy, which will eventually lead to a rise in interest rates.

She labelled rising inflation as temporary and warned against the overreaction which appears to be manifesting itself.

She sees no sign that price rises are becoming broad based and warned that the mounting pressure towards low-carbon economies may also drive prices higher.

Lagarde believes that the current rise in inflation has no bearing on the medium-term, which is the space in which Central Banks must operate.

Likewise, she sees no value in continual changes to policy, which should be adopted and then left to work. That is the crux of the recent changes to inflation policy that have been adopted following a full review earlier in the year.

The overriding message from the ECB is that there will be no short-term change to policy, despite inflation beginning to come in well above the ECB’s past target of 2%.

In contrast to the slightly less bullish comments of Andrew Bailey, Lagarde sees the economy returning to its pre-Pandemic level by the end of the year. That is testament to the turnaround in the fortunes of the Eurozone in recent months.

One potential driver of further inflation that the ECB will be wary of is wage negotiations, particularly in the public sector. She hopes that there will be no contamination of the negotiations from short-term issues that will bear little relevance in the medium term.

The euro began to play catch up with Sterling yesterday and fell versus the dollar. It reached a low of 1.1589, closing at 1.1597.

For more information and advice on mitigating risk that affect currency/market schedule a call with Christopher Smith.
https://calendly.com/christopher-smith-ct/15min

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