Transitory or not transitory, that is the question. Whilst not quite as profound as Hamlet’s musings it is certainly apt for current times. I would suggest inflationary pressures are here to stay for a while. Best start buying those Christmas toys soon. Ho ho ho.
We have had some widening percentage shifts on all currency pairings, especially Cable (GBP/USD) in the past month. The two and a quarter percent drop took Sterling to its lowest level against USD since December 2020 before finding resistance just over 1.34 the figure.
You can view recent movements in the graph below –
Fears of stagflation, petrol shortage and a general negative sentiment continued to weigh on the Pound last week. Lingering Brexit issues don’t help Sterling’s cause. Sentiment was so poor in the UK that YoY and QoQ positive GDP data, that both exceeded expectations couldn’t curtail Sterling’s downside move.
We had a slight bounce higher for Sterling with UK Manufacturing PMI beating estimates with a print of 57.1 on Friday. That gave the Pound a much-needed lift back over 1.35 the figure before the close. Downside risks remain for Sterling in Q4. If you have any upcoming requirements around SPOT or Forward Contracts, please reach out to the trading and execution team and they will be able to discuss a strategy that will protect you against adverse movements.
Inflation inflation inflation. This has been one of the main reasons for the Federal Reserve to signal it is about to taper its bond purchases. When the tapering commences is still open to debate. (Tapering is the gradual slowing of the pace of the Fed's large scale asset purchases. Once the tapering is complete then the Fed may go for reduction in the size of the balance sheet. The aim is to slowly remove the monetary stimulus)
We have the NFP figure (Non-Farm payrolls) released on Friday. Could we fall short of this Friday’s estimate of 500k from a 225k print last time? Potentially. If we see any figure on 500K we may see a slight sell off in the dollar.
Sterling/Euro is trading in the high 1.16s after a low last week of around 1.1550. EUR/USD has picked itself up off the floor from the mid-1.15s and is now settled in the 1.16s. As I’ve said all year I expect Sterling and Euro to largely cancel each other out. A few bloody noses on each side with no clear winner in the end.
You can view the recent price movements in Sterling/Euro in the graph below –
If you have requirements to purchase EUR from Sterling, please have a conversation with our trading and execution team. It may be prudent to consider a percentage of your requirements in a Forward Contract to mitigate your downside risk going into year end. There will certainly be some headwinds in Q4.
On the Eurozone side we had preliminary Eurozone CPI inflation that beat estimates with 3.4% YoY in September. This is up from 3% a month earlier. The inflation levels across the 19 countries soared to the greatest level since the height of the global financial crisis in 2008. Just like the Federal Reserve, this level of inflation will likely push the ECB toward reducing its bond purchases, thus potentially boosting EUR/USD.
Tomorrow we have the ECB President, Christine Lagarde speaking. Inflation and tapering will largely be on the menu. Retail Sales (YoY) (Aug) are released Wednesday. We expect a print of 0.4%.
I expect a bumpy ride in Q4. Particularly for Sterling. The pandemic and inflation are at various stages in various economies. How each economy deals with the multitude of issues over the coming months will largely shape the direction of currencies. Please make sure you have spoken to a member of the Aston team to implement a strategy that helps to mitigate these risks.
If you have any questions or would like to schedule a call with a member of the team please let me know.
Have a great week