Jamie Jemmeson
September 29, 2021

Sterling Slides as Risk Aversion Returns

Sterling – GBP Sinks to its Lowest Level Since February

Sterling hit its lowest level since February as sentiment deteriorated. The currency was hurt by the weaker tone surrounding risk appetite and was also undermined by increased reservations over the domestic outlook amid the surge in energy costs and supply difficulties.

Sterling was already under pressure following comments from Bank of England (BoE) Gov Bailey who had stipulated that “recent evidence appears to have strengthened that case, but there remain substantial uncertainties and we are monitoring the situation closely”. This is suggesting that the weak economic data of late could hold back this decision and raises the prospect of stagflation. Compounding the pressure on Sterling was new BoE MPC member Mann who stated that the further increase in market inflation expectations to an 8-year high is not troubling, implying their dovish stance within the committee.

Looking to the day ahead, the market will continue to monitor the supply chain developments for further directional sentiment clues. In addition, the housing data in the form of mortgage approvals and net lending are set for release whilst BoE Gov. Bailey is due to participate in a virtual panel discussion titled “Policy Panel” at the ECB Forum on Central Banking.

Dollar – Risk Aversion Rears its Head

The dollar remained well supported as investors remained in a cautious mood following another fall in equities and fears of faster monetary policy tightening by central banks. The S&P ended the day 2 per cent lower while yields on 10-year US Treasuries hit a 3-month high. The sell-off in equity markets comes as the US and UK indicated that interest rate hikes may come sooner than expected due to inflation concerns. Worries over inflation rates have been heightened by rising commodity prices. Yesterday, senior Federal Reserve officials warned that a failure to raise the US Debt ceiling would have consequences for post-pandemic economic recovery as Republicans blocked a bill to increase the borrowing limit.

Euro – Lagarde Tappers Inflationary Concerns

Christine Lagarde indicated yesterday that the European Central Bank (ECB) won’t react too soon to the threat of rising inflation rates, with little sign that the increase in inflation is broad-based across the Eurozone. The focus will remain primarily on steering the economy out of the pandemic while providing conditions to support the recovery. The ECB has slowed its pace of bond-buying and investors are waiting for the ECB to announce plans for ending its €1.85tn bond-buying programme in December. Data yesterday showed that Eurozone consumer activity returned to pre-pandemic levels as COVID-19 vaccine rates boosted consumer confidence.

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