Inflation, Fuel and Politics

GBP

The pound finished flat against the dollar last week but with 1% of volatility as the markets navigated both the Fed and Bank of England. Against the euro, the pound lost 0.1% but like the dollar also had 1% swings in the currency pair. Sterling weakened off at the beginning of the week as the markets over-discounted the risk environment, but Andrew Bailey and the Bank of England were more hawkish then expected which helped the pound recover on Thursday afternoon. The main driver of strength came from Dave Ramsden becoming the second MPC member to vote against maintaining the same asset purchasing target.

The pound is forecast for a strong end of the year by several major banks including Goldman Sachs who have revised their GBP/EUR forecast and see 1.19 being possible by the end of the first quarter of 2022. But the UK economy faces several headwinds which will lead to sensitivity in the pound. The first being employment data as the impact of having low unemployment but a high demand of labour could lead to a supply side shock to the UK economy. The recent fuel shortage hasn’t affected the pound yet but shows that Brexit is causing issues to the UK economy. It’s a quiet week for UK data, with a speech from Andrew Baily on Monday afternoon at the Society of Professional Economists Annual Dinner but he is unlikely to speak about any changes in policy. On Thursday, UK GDP will be released for Q2 which is expected at -1.5% a major step down from the previous reading of 4.8%.

USD

The main event for the dollar last week was the Fed announcement on Thursday evening where the USD got a boost from Fed chair Jerome Powell announcing that the tapering could be concluded by next summer. This has led to some analysts forecasting a rate hike as early as Q3 2022. It came as a surprise that the dollar didn’t push further against its peers after this announcement but shows that the market still hold reservations about the growing inflation in the US and whether, as the Fed believe it is just transitionary. On Thursday there were several PMI releases for the US which all missed their predictions and adds further risk to investors that the US economy could be facing difficultly.

This week the Fed will be back in the news with a pleather of Fed speakers as well as Jerome Powell testifying to congress on Tuesday. Though it is unlikely that any of these speeches will surprise markets as the Fed were very clear that tapering will be announced in November. The economic calendar is extremely busy for the US this week and will offer a fresh perspective on the health of the US economy. The focus of the data will be on consumer confidence, personal income and the September ISM Manufacturing. The Evergrande story is far from over and could lead to some dollar strength as markets look to exit risk assets and look for a safe-haven instead.

EUR

The euro traded sideways against the dollar last week as several major events failed to generate any clear directional move. September’s Market PMI Composite for the eurozone failed to impress being released at 56.1 compared to a consensus of 58.5. German elections dominated the news over the weekend, where the centre-left party claimed a narrow victory over Angela Merkel’s Christian Democratic Union of Germany. The elections have not had much impact on the euro so far, but left-wing government are normally seen as negative for currency as they are perceived as less pro-business.

Inflation looks to be the key driver for the euro this week with September Eurozone CPI released on Friday expected to rise to 3.3%. If this is the case, then ECB hawks are likely to be vocal on the needs to raise rates and should lead to a boost in the euro. Christine Lagarde will be making two speeches this week on Monday and Wednesday though this only likely to counterbalance the hawks as she tries to downplay the need to raise rates.