Jamie Jemmeson
October 5, 2021

Sterling Retraces Losses as Brexit Concerns Re-Emerge in the Eurozone

Sterling Retraces Losses On Inflation Concerns 

Sterling retraced some of its losses from the previous week after rejecting the psychological level against the US Dollar. There were expectations that higher inflation could force the Bank of England (BoE) to raise interest rates sooner rather than later while higher nominal yields helped underpin the UK currency despite very negative real rates. In the meantime, UK Brexit Minister Frost stated that everything needed to be tried before triggering Article 16 and pulling out of Northern Ireland. 

Looking to the day ahead it is quiet in terms of data for the UK. The market will continue to keep an eye on the Northern Ireland situation as well as the ongoing fuel crisis.

US Markets Look to Jobs Data to Trigger Tapering

The Dollar index remains close to a year high amid expectations that the Federal Reserve (Fed) will taper stimulus from November and start hiking rates next year. Attention will turn to this week’s release of September payroll data, with 460,000 jobs expecting to have been added during the month, enough to keep Fed on course to begin tapering before the end of the year. Recent data has shown an increase in Personal Spending data, while Consumer confidence has been revised higher.

Evergrande remains on the agenda for investors, weighing on stock markets and lending support to the Dollar. Trading in shares had been suspended by the Hong Kong exchange amid speculation the debt-laden Chinese construction group will sell off its property management arm. With liabilities equal to 2% of China’s GDP, Evergrande has sparked concerns its woes could spread through financial markets.

Ahead of the key payroll data release on Friday, markets will have updated ISM Services, PMI figures and the September ADP survey and unemployment rate to digest.

Brexit Concerns Re-Emerge In The Eurozone

Following a rather quiet day on the Eurozone macro-calendar yesterday, the Euro remained relatively range-bound versus its major rivals. Despite a quiet calendar, we did see ongoing tensions between the UK and EU escalate further with Lord Frost threatening the EU to renegotiate the Northern Ireland Protocol by November or the UK will trigger Article 16. The move would suspend parts of the Brexit treaty designed to protect against economic and societal emergencies. It is expected that EU leaders will present counterproposals by Mid-October. Of the little data we did see from the EU, the Eurozone Sentix investor confidence index surprised to the downside, recording an October reading of 16.9 versus a forecasted reading of 18.5 which already presented a decline from the previous reading of 19.6. The reading confirmed concerns that the rising energy costs across Europe could undermine the economic outlook for the bloc.

Looking ahead at today, we have a plethora of Services PMI data out from Spain, Italy, France, Germany, and Euro Final Services PMI. Perhaps of more interest for currency markets, however, will be European Central Bank (ECB) President Christine Lagarde speaking this afternoon in Frankfurt which could drive movement in the single currency.

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