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Oliver Valdez
October 19, 2021

Can the Pound Maintain its 20 Month Peak?

Uncertainty Continues to Hinder the Sterling

The pound has enjoyed another 20-month high on Friday against the euro as the pound has yet again reached 1.18 for the third time since April and has broken through and peaked at 1.1870 on the interbank. The last time that the pound went up to this level was back in February 2020. Historically speaking however, the 1.18 level has always shown a strong level of resistance and has always proven difficult to move above it.

The UK’s furlough scheme ended just a few weeks ago but despite it ending the UK unemployment rate fell from 4.6% to 4.5% in August. UK job vacancies hit a record high.

Looking at the current trend, it seems as though sterling is likely to reach the 1.20 levels against the Euro, however, there could be several key factors which could spoil this bullish movement.

As the UK head towards winter, one of the main concerns is still the ongoing pandemic, on Saturday, there were just over 43,000 new cases of the virus resulting to a fourth consecutive day of having new cases reaching over 40,000. If these cases continue to increase, we could see a partial lockdown yet again with Christmas just a few months away.

Another catalyst which that could push the pound down is the constant increase of energy prices within the UK. This energy hike has resulted in more energy companies going bust. The company “Pure Planet energy” and “Colorado Energy” have been the latest victims of this crisis. Pure Planet Energy is a company backed by the Oil company BP with 235,000 domestic customers under their belt and Colorado Energy having 15,000 residential customers of their own. Pure Planet have said that they’ve been caught between the rising cost as well as the UK’s energy price cap that limits what companies can charge their customers. Energy Regulator Ofgem is now going to find new energy suppliers for both Pure Planet and Colorado energy. Director of retail at Ofgem Neil Lawrence said “Ofgem’s number one priority is to protect customers, I want to reassure affected customers that they do not need to worry: under our safety net we’ll make sure your energy supplies continue.”

As this crisis continues, it isn’t just energy companies that are being affected, local businesses could also take a hit as the cost of their energy could prove too much which could lead to local business closing and have a domino effect on economy.

Looking at this week’s economic data releases, there is only one which is tomorrow’s Customer Price Index year on year data. It is currently expected to remain the same at 3.2%, anything below could cause some volatility in the market.

Can the Eurozone Bounce back has the energy crisis affects the Bloc

The Euro has not shown a great amount of fight back against its major counterparts. The single Currency has reached a 20-month low against the Pound as well as reaching a 3-month low against the Dollar. Although there were not a lot of economic data that was released last week, this did not stop the Euro from weakening.

Sticking with the current energy crisis, the Eurozone is also experiencing a price hike due to a shortage of natural gas which is a result of the post pandemic demand being ahead of its supply. This has led to having shortages globally. There are several reasons why there has been a massive shortage on the natural gas supply. A couple reasons for this is the fact that Europe are looking to move away from fossil fuels which meant that they had very small amount of gas or coal capacity. The Netherlands, Europe’s top producer of natural gas, began phasing out their main gas field back in 2018. Another reason for the fuel shortages was due to Russia limiting its gas supplies to Europe which is around a third of it supplies. If this shortage of fuel continues, it could have a massive affect towards the single currency and just like the UK could result to small and medium businesses from keeping its doors open resulting in a weaker economy.

Looking at the economic news ahead this week, the Flash Manufacturing PMI data will be released on Friday which could cause some movement on the Euro.

USD

The Dollar has remains strong against the Pound and the Euro. Many economic data have been going in favour of the Dollar. Last week we saw the Customer Price index month on month data increase by 0.1% as well as the unemployment rate dropping by 0.2%. Last week’s retail sales have also gone in favour of the Dollar reaching up to 0.7% from the expected -0.2%.

With theses current economic data releases, there’s great optimism going around the largest economy which shows confidence towards investors. However, as economic recovery continues to grow the inflation also follows with it. Of course, having inflation isn’t a bad thing but having too high of an inflation could damage the economy as it prevents consumers from purchasing.

As mentioned on yesterday’s report, inflation is the highest it’s been since the 2008 recession. Some analysts say that they could be expecting 7- 8% inflation for 2022. This just goes to show that the US Economy is Getting stronger but also that inflation is not as transitory, which could lead to some Dollar weakness.

This week there are no Major Economic Data releases which could cause any volatility on the Dollar but do keep in touch with your account manager here at Lumon for the latest market movements.

This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).