Stagflation fears grip markets

Jeremy Thomson-Cook
Jeremy Thomson-Cook 04 October 2021

GBP: Tries to recover

EUR: ECB stick with “high inflation is transitory” mantra

USD: Focus on monthly employment report

Sterling

Sterling had a bumpy ride last week falling to a fresh 1 year low versus the US dollar as soaring energy costs, the deepening fuel crisis and the shortage of HGV drivers all weighed heavily on the currency.

Deepening fears of a slowdown in growth eventually pulled the pound lower despite the more recent hawkish commentary from the Bank of England. Following BOE Governor Bailey’s statement that all conditions have now been met for a rise in interest rates the initial reaction from markets was to bring forward expectations of the first UK rate rise to February next year, and furthermore to price in two further rate rises by the end of 2022.

With the ending of the Furlough Scheme, Universal Credit booster payments, higher energy costs and wages stagnating, sterling eventually capitulated before regaining a modicum of poise as broad US dollar selling gathered pace at the end of last week as equity markets recovered.

There is no tier 1 data slated for the UK economy calendar this week with Friday’s BOE quarterly bulletin being the main event.

Euro

The single currency remained in a very tight trading range last week as a big sell-off in global equity markets attracted safe haven support flows to the Euro. The ECB are still the most vehement of Central Banks in their continued belief that the above target rise in inflation will prove to be transitory and therefore with no rate moves expected for the foreseeable future we expect the Euro to remain rangebound. Further evidence of the ECB’s benign monetary policy forward guidance will be on offer this week at the Eurogroup meeting.

USD

The dollar soared to new yearly highs versus most G10 currencies in the early part of last week as the steep sell-off in global risk assets gathered pace with the greenback once again proving to be the ultimate safe haven. Recent commentary from Fed Chair Powell admitting that the current high levels of inflation are proving to be less transitory than previously anticipated also added support as expectations of the first rise in US interest rates was brought forward by the markets to the end of next year.

All eyes will now switch to the US monthly employment report due Friday where a recovery from last month’s increase of 235k jobs is forecast with market consensus predicting a rise of 500k jobs and the unemployment rate to drop from 5.2% to 5.1%.

Elsewhere

Interest rate decisions from Australia and New Zealand are due Tuesday and Wednesday respectively this week. The recent Covid lockdowns and fears of a Chinese economic slowdown have been weighing very heavily on the Aussie Dollar and as such no change in Australian interest rates is expected, but a rise from 0.25% to 0.5% is forecast over in NZ.

Market rates

Today's Interbank Rates at 08:45 against sterling. Movement vs Friday.

Euro €1.167
US dollar $1.355
Australian dollar $1.867
South African rand R20.25
Japanese yen ¥150.6

Have a great day.