Pound Slumps as Political Volatility Dominates Headlines
GBP/EUR: Down from €1.15 to €1.14
GBP/USD: Down from $1.13 to $1.12
The Pound (GBP) rose briefly at the beginning of last week, as new Chancellor Jeremy Hunt reversed the majority of his predecessor’s unfunded tax cuts. Markets breathed a sigh of relief over the prospect of reduced government borrowing.
Sterling gains were soon lost, however, as political and economic instability rocked the currency. Mixed messages regarding the Bank of England (BoE)’s sale of government gilts undermined GBP optimism, while Prime Minister Liz Truss faced increasing criticism over her repeated policy U-turns.
Midweek, higher-than-expected UK inflation increased pressure upon the Pound. Ordinarily, higher inflation would boost GBP, encouraging rate hike bets: Sterling weakened, however, as analysts worried over higher living costs and the risk of a recession.
On Thursday, GBP enjoyed some support as a dovish speech from BoE Deputy Governor Ben Broadbent reduced expectations of successive interest rate hikes. Rather than disappointing markets, investors were relieved by the prospect of stabilising government bond yields.
Liz Truss’s resignation as PM also inspired an initial uptick, marking the end of a turbulent period for British politics. However, GBP sentiment clouded over on Friday given the governmental uncertainty ahead.
Also dampening the Pound outlook was a persistent increase in government borrowing: September’s debt rose to £20bn from £17.8bn in a year before. Disappointing retail data added to GBP losses.
Euro (EUR) Trades Mixed as Ukraine Conflict Escalates
EUR/GBP: Up from £0.86 to £0.87
EUR/USD: Unchanged at $0.98
The Euro (EUR) traded in a mixed range last week, strengthening against the Pound but wavering against its other peers. Ongoing conflict across Ukraine dampened support for the shared currency as increasing Russian violence pressured international relations.
Since the explosion on the Kerch bridge earlier in the month, Russia has been launching continuous rocket and kamikaze drone attacks on Ukrainian cities and energy infrastructure, causing power cuts as temperatures drop for winter.
Furthermore, German economic sentiment remained close to multi-year lows according to Tuesday’s data, though improving slightly on September’s data. The news failed to lend significant tailwinds to the single currency.
Midweek, inflation in the Eurozone missed forecasts, extending EUR losses. The release dampened rate hike bets, although economists noted that consumer prices remained at a record high. ING analysts remarked that steady increases in food and core inflation were unlikely to be reversed quickly.
At the end of the week, evidence emerged that Iran was supplying Moscow with weapons and training, raising fears of increased international tensions. Greater losses were capped, however, by better-than-expected consumer confidence data.
US Dollar (USD) Wavers on Changeable Risk Sentiment
USD/GBP: Unchanged at £0.88
USD/EUR: Unchanged at €1.01
The US Dollar (USD) was influenced by volatile risk sentiment last week, intermittently enjoying tailwinds on account of its safe-haven status.
However, market sentiment on Monday was largely upbeat, sapping support for the currency. Investors cheered the British government’s mini-budget U-turn, as the prospect of a new Chancellor eased economic jitters somewhat.
Into Tuesday, the ‘Greenback’ remained subdued despite a rise in industrial production in the world’s largest economy. Capping further losses may have been optimistic rate hike bets – the Federal Reserve’s Neel Kashkari remarked that the bank was ‘quite a ways away’ from pausing interest rate hikes.
Midweek, USD was able to recover some of its losses as economic and political news raised concerns of global economic instability. A revival in risk appetite limited the currency’s uptrend on Thursday, however.
At the end of the week, further hawkish rhetoric from the Fed managed to boost the US Dollar, helping it recoup some of the week’s losses.