Tom Holian
November 15, 2021

GBP Under Pressure But Could We See Some Support Coming For Sterling?

Sterling has been relatively stable during the course of last week with little movement between both the Euro and the US Dollar.

Following the Bank of England’s (BoE) decision to keep interest rates on hold, this caused Sterling to fall against both the Euro and the US Dollar. This caused GBPUSD exchange rates to fall to their lowest level to buy US Dollars during 2021.

It was widely anticipated that the BoE would increase interest rates from their record low but as they kept rates on hold this caused Sterling to dip against several major currencies.

At the end of last week, the Office of National Statistics (ONS) confirmed that UK GDP had been measured at 1.3% which came out lower than expected. There were several factors involved as to why the growth figures came out as they did.

Supply chain issues have continued as well as issues with new business investment which is still down compared to previous figures at the start of the pandemic.

This kept Sterling from making any gains towards the end of last week. However, although the figures were lower than expected, the UK has been the best performing out of all the G7 nations.

Tomorrow morning brings with it the latest set of UK unemployment data. This will include the latest claimant count for the UK as well as the ILO unemployment figures. However, this will crucially also include UK Average Earnings which will help to show the impact of how much people in the UK are earning compared to rising inflation levels.

If we see positive news, then this could provide Sterling with some support against both the Euro and the US Dollar.

Euro Struggling With COVID-19 Cases On The Rise

Earlier this month the European Central Bank (ECB) claimed that they would not be looking to change interest rates during 2022.

Eurozone inflation levels are currently the highest seen in the last thirteen years and typically a country or zone would look to increase interest rates but seemingly this is not the case for the Eurozone.

The Euro is close to its lowest point vs Sterling since the start of the pandemic and the lowest point vs the US Dollar since the summer of 2020.

Across the board, the single currency is continuing to struggle owing not only to current monetary policy but the issues surrounding COVID-19.  

Germany has recorded its highest infection rate since the start of the pandemic and other countries are also struggling with increasing levels of infection.

Some European countries have imposed restrictions once again and it appears as though the UK is not looking to implement Plan B anytime soon.

If the issue on the continent continues to worsen then this could see further restrictions put in place which could harm the economy.

Therefore, this could also have a negative impact on anyone looking to buy the Euro with US Dollars or Sterling.

On Friday the Eurozone announced its latest Industrial Production figures for September for both month on month and year on year.

Both came out slightly better than expected but we saw little movement for the value of the Euro highlighting its fragile position at the moment against both Sterling and the US Dollar.

This week we will see a significant amount of important data for the Eurozone with the release of Eurozone GDP data as well as Inflation data. GDP is released on Tuesday morning with the expectation of a 2.2% growth quarter on quarter. However, arguably the most important data will come out on Thursday with Eurozone inflation.

The expectation is for 4.1% so anything higher could put some pressure on the ECB to consider raising interest rates prior to their previous comments.

Dollar goes from strength to strength

The US Dollar has been continuing to strengthen vs Sterling with GBPUSD rates now at their lowest point since last year. The ongoing issues surrounding Brexit appears to also be causing a lack of positivity surrounding Sterling to the benefit of the US Dollar.

The world’s leading economy has also gained support following the better-than-expected jobs data last week which came out over 530,000 compared to the expectation of 450,000 for October.

Similarly, with most major economies the US is having issues with rising levels of inflation with the latest reports showing higher than expected. US inflation showed prices have risen by 6.2% during the last twelve months until October compared with 5.4% in the year-on-year figures for September. Indeed, US inflation levels are currently at their highest rate since 1990.

Typically, a central bank would look to increase interest rates in order to combat rising inflation, but the US Federal Reserve has confirmed that it will be keeping interest rates on hold for the time being.

As the BoE and ECB have both kept rates on hold this has helped the Dollar to gain against both Sterling and the Euro in recent times.

Indeed, the mere suggestion of an interest rate hike can often have the impact of lowering inflation otherwise known as the ‘Maradona effect’. (https://www.bankofengland.co.uk/-/media/boe/files/speech/2005/monetary-policy-practice-ahead-of-theory)

As we move forward this week US Retail Sales data is due out on Tuesday afternoon which will give us a clear indication as to the strength of the US economy and how consumers are reacting to current market conditions.  Expectations are for 0.7% month on month for October.

At the same time, US Industrial Production is also due out with another expectation for growth of 0.7% month on month so anything different could cause some volatility for USD exchange rates.

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).