Jonathan Watson
October 8, 2021

GBP EUR Nears 2021 Highs Whilst GBP USD Nears 2021 Lows

Twisting sentiment in the currency market has seen Sterling as a mixed performer this week with a rise against the Euro to an eight-week high, whilst against the US dollar Sterling has dropped to the lows of 2021.

This is less to do with Sterling itself, and more to do with overall market sentiment as concerns rise over a deteriorating global economic outlook on the back of rising global energy costs. Fears over gas supplies have seen the Euro weaker and investors have sought out the safe-haven status of the US Dollar.

This trend is epitomised by the movement on EURUSD exchange rates where the Euro is the weakest against the US Dollar it has been since July 2020, pushing the Dollar higher against Sterling.

When we look at Sterling against other currency pairings we do get a truer picture of its performance, with Sterling lower against the Australian Dollar, the New Zealand Dollar and many others, compared to the higher points in recent weeks.

You don’t need to read too deeply into the news to find out some of the troubles facing the UK with worries over fuel shortages at the pumps, rising energy costs, and fears over supermarket shelves running out.

Many supermarkets have been reporting well above usual sales of Christmas products, with turkey sales being 400% above normal for this time of year. The Bank of England (BoE) lowered growth forecasts at their last meeting, providing those expecting Sterling to be stronger with some food for thought for its next move.

However, amidst the doom and gloom, there could be some positive signs for Sterling. The Sterling has been finding some support from the prospect that rising inflation will ultimately need to be tempered by the raising of interest rates.

Regular readers and those more familiar with the behavior of exchange rates will know that the raising of, or the prospect of rising interest rates can lead to strength in that currency by making it more attractive to hold.

Paradoxically, the elements keeping Sterling weaker outlined above, i.e. rising inflation and living costs, are also leading to possibly higher interest rates and are closely linked to the potential for a stronger Sterling ahead.

Our research team here at Lumon has been very helpful in analysing some of the currency forecasts ahead by major financial institutions over the last few weeks. In their latest assessments, we found that most of the forecasters predict the Sterling to be stronger against both the Euro and US Dollar over the next 6 and 12 months.

Whilst encouraging for any customers looking to buy either currency with Sterling, it is worth remembering that this average outlook was not too dissimilar earlier in the year.

Whilst the economic theory seems to suggest the Sterling should be making advances to fresh highs, it appears the currency markets are still quite cautious when it comes to Sterling, as evidenced by the sharp sell-off witnessed last week.

Gas Price Uncertainty Sees a Weaker Euro

The Euro has fallen out of favour this week as concerns over the gas supply in Europe threaten the fragile economic recovery that had previously supported the single currency. The Euro dropped to an eight-week low against Sterling, itself one of the lower performers in the last week, whilst against the US Dollar the Euro has fallen to a 15-month low.

This performance is also attributable to the rising US Dollar where investors have sought the safety of the American currency to shield themselves from the potential weakness not just in the Eurozone, but also globally.

There is concern that Russia is limiting supplies to the wider market to raise support for a new pipeline ‘Nord Stream 2’ which would make Europe even more reliant on the Russian bear for supplies.

The price of gas did at one point rise 40% this week, only to fall slightly when President Putin confirmed he would look to help support supply. The underlying issue remains, however, and in such an environment the Euro has been weaker.

The economic recovery following the pandemic has been fragile for all countries but for the Eurozone, it has carried an extra element of risk with many countries being so reliant on tourism. In many forecasters’ impressions ahead, the concern over a return to normality for the travel industry has led to trepidation when evaluating the Euro.

The Eurozone has also been very forward-thinking in abandoning some of the more polluting and risky forms of energy such as coal and nuclear power plants. Whilst more environmentally friendly wind and solar panels have filled the gap, so too has an increased reliance on LNG, Liquefied Natural Gas, noted as the ‘cleanest’ fossil fuel.

The outlook for the Euro has been clouded by these latest energy price fears, as it makes the prospect of scaling back monetary support less likely from the European Central Bank (ECB). This is another reason which helps explain why the pound and US Dollar have advanced against the single currency, as investors believe it is much more likely the US and UK will be raising interest rates or scaling back their monetary support ahead of the Eurozone.

Will The Latest US Non-Farm Payroll Derail the Recent US Dollar Strength?

When times of uncertainty increase, you can usually witness the US Dollar rising as investors seek certainty and stability. With global energy and commodity prices rising and markets becoming fearful the fragile, economic rebound from the pandemic is under threat, the ‘greenback’ has been stronger. This has had a knock-on effect elsewhere in the currency market since the American currency accounts for around 60% of globally traded foreign exchange.

We have seen a big swing on EURUSD which has dropped to a 15-month low as the US Dollar rises. This has dragged the single currency down against others leading to good opportunities for buying the euro.

Expectations ahead suggest that the US Dollar could continue to be strong if there is continued uncertainty over global energy supplies and an ongoing threat to the global economic recovery.

In terms of more immediate news to shape the behaviour of the US Dollar and influence market sentiment, we have today, the latest Non-Farm Payroll data which is always one of the more important economic data releases we have on offer.

Determining the number of new jobs created provides a snapshot of the state of the economic recovery in the United States and supports the expected outlook for the global economy.

For today, the expectation is 488,000 new jobs created in the American economy, which would be an increase on the last number for August of 235,000. Any signs that the American economy is improving further could put more pressure on the US Federal Reserve to consider scaling back monetary policy.

Another reason for the recent rise of the US Dollar has been increased expectations the Fed will sooner than later need to look at scaling back some of the monetary support in place since the pandemic.

Some commentators believe the path to higher interest rates and scaling back monetary policy could begin this side of Christmas, any signs of strong improvements in the jobs market today could further help to fuel that speculation and see the dollar stronger, with the potential for a further continuation of the trends in the wider currency market we have seen this week, outlined in this report.

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).