Joseph Wright
October 5, 2021

Sterling Climbs On Bullish Outlook From UK Chancellor Of The Exchequer

Yesterday was a strong day for Sterling after the currency climbed against all major currency pairs. The Sterling to Euro exchange rate hit highs of about 1.17 which is just over a cent from the highest levels available in over 18 months, and Sterling also managed to recoup some of the recent losses against the US Dollar. The price changes for cable (GBP to USD) stand out as the US Dollar has been a very strong performing currency recently.

Perhaps the catalyst for Sterling’s strong performance can be put down to comments from Rishi Sunak, the Chancellor of the Exchequer. He is speaking at the Tory conference which takes place in Manchester, and I expect financial markets to pay close attention to his comments over the next few weeks as the Autumn Budget takes place at the end of this month on the 27th.

Sunak is usually known for being less prone to excessive optimism, but his comments yesterday were quite bullish by his usual standards. He commented on Brexit declaring that it will be worth it for the economy in the long run. He also said that the UK could be ‘the most exciting place on the planet’ so this kind of commentary may have helped Sterling gain in value yesterday, as these aren’t the comments of someone that feels gloomy regarding the UK’s potential.

Economic data out of the UK is relatively light this week but on Wednesday Prime Minister Boris Johnson will be speaking. He may have asked his cabinet to hold off from many key announcements so he can make them himself, so this is worth monitoring.

Services PMI figures will be released this morning, and this is also worth following, due to the importance of the sector to the UK economy. PMI figures cover sentiment and optimism so these releases can impact currency values.

Euro Hits 14-Month Low Against The US Dollar

The Euro has been coming under pressure not just against Sterling, but also against many other major currency pairs such as the US Dollar. The EUR to GBP exchange rate is trading close to the lowest levels in over 18 months and the EUR to USD rate recently hit headlines after hitting a 14-month low. Comparing currencies to the US Dollar can be a good indicator of currency strength as it tends to be the benchmark currency that many assets such as oil, gold, and even bitcoin are denominated in.

Investor morale in the Eurozone has fallen for the last 3 months in a row and it’s currently at its lowest levels since April. The drop is due to lower expectations of economic prospects based on Sentix readings.

From a political standpoint, the German election is a key point within financial headlines. This is often the case as Germany is the powerhouse within the Eurozone economy, but this election is perhaps more significant due to Angela Merkel stepping down as German Chancellor. She has been serving as the chancellor of Germany since 2005, she’s the first female chancellor of Germany and was the leader of the Christian Democratic Union (CDU) from 2000 to 2018 so her stepping down at the 2021 federal election is a key talking point.

Last Sunday there was a close result in the election, with the Social Democratic Party (SPD) preparing for 3-way talks with the Free Democratic Party (FDP) and the Greens.

Political uncertainty can often result in a weakening of the underlying currency, so it’s worth monitoring the outcome of these negotiations.

Biden Struggles To Implement His Agenda

As covered within our GBP and EUR sections, the US Dollar has recently benefited from market jitters owing to several concerns worldwide. News broke recently that China’s second-largest property firm, Evergrande is experiencing financial difficulties and warned of financial defaults. Inflation levels have also increased recently on a global scale, but this isn’t in tandem with growth which is concerning financial analysts. The term for this is stagflation and should central banks begin to hike interest rates as many have alluded to, this could result in economic strife.

These kinds of financial concerns have caused a rush for safe-haven currencies such as the US Dollar, which has seen US Dollar exchange rates strengthen with the Dollar hitting a 10-month high against Sterling and a 14-month high against the Euro to put things into perspective.

I think that those of our readers following the US Dollar should be aware that the gains are predominantly a result of the above reasons in our opinion, as opposed to bullish financial performance within the US.

The Bank of England (BoE) is more likely to hike interest rates than the Federal Reserve according to many financial commentators and President Biden is currently struggling to implement his financial plans and transform the US economy. If he can convince not just Republicans but also Democrats in states such as West Virginia and Arizona, which are currently opposing his proposed deal, it will hand his government a bigger role in the economy than it’s had in generations. Despite these plans being popular with voters, many elected Republicans were staunchly against the proposed deal.

On Friday this week Non-Farm Payrolls will be released which are a key measure of the US economy, as they cover new jobs created outside of the farming sector. 460k new jobs are expected to have been created through September so expect any deviations from this figure to potentially influence USD exchange rates.

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