Q4 set to be tough for sterling

Jeremy Thomson-Cook
Jeremy Thomson-Cook 01 October 2021

GBP: Political issues to pick up into Christmas

EUR: Inflation does little

USD: Haven demand remains strong

Sterling

Another tough week for the pound is coming to an end although we do not expect this weekend to reset market fears on sterling.

A number of the issues that will come to affect the pound in the short term are political and also will see a large strain put on people’s finances.

The furlough scheme ended yesterday with around 1 million workers still benefiting from it while there is also an effective VAT tax hike as pandemic help is phased out. Lastly, at a period when energy prices are rising, the universal credit uplift is being cancelled.

Winter will lead to a surge in Covid cases – it’s a respiratory disease, to suggest not is naïve – and possible closures of workplaces again.
This winter will almost be trickier than last year’s and sterling is not in a position to benefit.

Euro

Despite an inflation release above 4% in Germany, the highest since the early 1990s, the euro was not bought by traders yesterday. It’s clear therefore that while markets will listen to some chatter about higher ECB policy rates, in a market wherein other central banks are closer to raising rates, a high inflation number in the Eurozone just isn’t going to cut it.

Despite its short-term pop higher earlier this week it makes sense for EURUSD to want to test 1.15 before it has a chance of moving higher once again.

USD

Beginning this quarter with falling stock market prices is a dark omen for things to come and with both European and US equities moving lower, the dollar is getting a bid on haven demand.

Debt ceiling negotiations are ongoing ahead of a potential government shutdown from October 18th, a date wherein the Treasury Secretary believes that the US government will run out of money. Despite this being a US-centric issue, we should see the USD strengthen on a shutdown purely on risk aversion.

We put the chances of the US government actually shutting down at 1/3.

Elsewhere

Alongside the stronger USD, the yen is also benefiting from negative press stories and a generalised feeling of apprehension in markets. The yen remains in a very weak position however, and we do not see this period of exuberance lasting long.

Market rates

Today's Interbank Rates at 09:22 against sterling. Movement vs yesterday.

Euro €1.162
US dollar $1.345
Australian dollar $1.865
South African rand R20.21
Japanese yen ¥149.5

Have a great day and a better weekend.