James Lovick
November 12, 2021

Sterling on the Back Foot as Economic Growth Slowed in Q3

GBP

The pound has clawed back some of the losses seen last week when levels dipped to a five-week low for GBP EUR and close to the 2021 low seen in September against the US dollar. However, UK Gross Domestic Product Data released yesterday kept sterling on the back foot after the numbers showed economic growth slowed in the third quarter. GDP arrived at a weaker than expected 1.3% keeping pressure on the pound. The markets are now focussing on the next Bank of England meeting in December where speculation is mounting there could be a hike after the bank surprised the markets and held rates steady.

Jordan Rochester, currency strategist at Nomura said last week following that interest rate decision “Usually after a decline like yesterday’s, you’ll see markets take a breather but the negative signs for the pound are stacking up right now.”

There are many reports emerging that the UK is considering triggering Article 16, the mechanism that would allow Britain to suspend the Northern Ireland part of the Brexit agreement. The EU has promised a “clear response” if it is triggered and would inevitably create uncertainty for the future relationship between the UK and EU. To recap the UK has found a number of issues which it feels gives sufficient ground to permit the triggering of the article.. Lord Frost handling the negotiations for the UK has said that it may be the only option. Whilst the UK wishes to explore all options there is growing speculation that such an outcome could be just a few weeks away. It has been reported that Edwin Poots who is the Minister of Agriculture in Northern Ireland is already preparing his team for such action.

Lord Frost meets his counterpart Maros Sefcovic today and any statements could cause volatility for GBP EUR exchange rates. The Times reports that a no-deal Brexit will be back on the cards if the UK triggers Article 16 according to members of the House of Lords.

The Bank of England next meet Thursday 16th December. Ulrich Leuchtmann, head of FX research at Commerzbank has said “It is possible that the rate step expected will follow at the next meeting.”

It’s also worth noting that many of the banks and building societies have already withdrawn the lowest rates on home loans. HSBC, Natwest and Nationwide raised rates on products last Thursday.

Next week sees important UK inflation data that could be market mover for sterling exchange rates. The Bank of England will be closely monitoring the inflation numbers in the months ahead which will help determine the extent of its monetary tightening and the pace of interest rate hikes.

EUR

The Eurozone is currently experiencing a surge in coronavirus infections to levels not seen in months stoking fears that the EU could be immersed in a new wave of the pandemic in the winter months. The Financial Times reports that Hans Kluge, regional head of the World Health Organisation has highlighted that the pace of transmission in the EU and across central Asia is of “grave concern” and added that the EU could return to the “epicentre” of the pandemic.

Germany has reported the highest number of new infections since the start of the pandemic. Some of this is being blamed on a poor uptake in vaccinations with the inoculation rate lagging Italy, France and Spain.

The surge in Covid cases is also taking a hold in Eastern Europe where vaccination levels are lower than Western Europe. Slovakia recorded the highest level of infections since the start of the pandemic whilst Romania and Bulgaria are also seeing sharp climbs higher.

These developments are important as any further restrictive measures that need to be introduced to slow the spread of the virus will slow economic growth and may have a negative impact on the Euro exchange rate. The Netherlands and Belgium have recently had to reintroduce measures to curb the spread of the virus.

EU industrial production data are released this morning which may offer some more clues as to the health of the EU economy. Trade balance data are released on Monday whilst Gross Domestic Product figures on Tuesday could create some volatility for the Euro. Thursday sees EU inflation data which could present some market movement for the Euro. To date the European Central Bank has reiterated its belief that the higher inflation being seen will be transitory. If the European Central Bank is forced to change tact in its thinking as have the US Federal Reserve and Bank of England, then the Euro could move upwards on future interest rate expectations.

USD

Despite the US markets being closed for Veterans Day yesterday there was some market movement for GBP USD with a fall in sterling following the weaker UK GDP numbers. The US economy has seen a run of stronger economic data which has helped support the dollar. The US has recorded strong jobs growth with employers adding 531,000 jobs in October. The numbers were considerably higher than the 450,000 that had been forecasted with much of the gains seen in the leisure and hospitality sector as food and drinking establishments re-emerge from the pandemic.

Unemployment also improved which fell lower to 4.6% in October, down from 4.8% in September. It was only four months ago in June when unemployment was clocking 5.9%.

The better data is welcome at this time as the US Federal Reserve contemplates tightening monetary policy in the months ahead, something which should help support the dollar.

Inflation too is on the climb as it is in the UK and Eurozone and the Fed has had to change its position. Raphael Bostic, president of the Federal Reserve Bank of Atlanta said “Transitory is a dirty word. It is becoming increasingly clear that this episode that has animated price pressures – mainly the intense and widespread supply-chain disruptions – will not be brief.”

Nonetheless the view from Fed Chair Jerome Powell is that inflation will be moving down by the second and third quarters of next year. As such he intends to cut the $120 billion monthly purchases by $15 billion to start this month and bring this era of stimulus to an end in the middle of 2022.

Any changes in this guidance will likely see market volatility for dollar exchange rates. Any more signs to suggest inflation is becoming more problematic will only create more tough decisions ahead for the Fed.

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