Ben Fletcher
October 4, 2021

Sterling Regains Traction as US Government Faces Finance Concerns

Sterling Wins Back Lost Ground Against The Euro

By the end of last week, Sterling made back some of its lost ground against the Euro as 1.17 was once again revisited on Friday. Earlier in the week the GBP/EUR had fallen all the way into the mid-1.15s which was the lowest rate since the end of July. Against the US Dollar, Sterling gave up 3% in the space of a few days as fuel panic buying in the UK coupled with uncertainty around US debt levels took centre stage.

Over the weekend, Boris Johnson suggested there could be tax increases coming soon citing the costs of COVID-19. The Prime Minister wouldn’t deny that future hikes could be around the corner. Whilst this may not have an immediate effect on Sterling’s value, there could certainly be an impact further down the line with economic performance. If there are changes to tax especially coupled with increased costs with electricity, then there could be less disposable income for consumers to spend. It does take time for these changes to be implemented but following the pandemic economic growth is vital for the strength of Sterling.

This week is quiet on the data front, but it will be interesting to see how the GBP/EUR moves following a very volatile week last week. This morning the GBP/EUR is just under 1.17 so a positive start to the week for Sterling could bring around trading levels in the 1.17’s once again for buying Euros

Week Ahead Quite Busy For The Eurozone With Multiple Data Releases

German election negotiations have been continuing over the weekend with positive movement thought to be between the election winners Social Democrat Party (SPD) and the Green Party coupled with the Free Democratic Party (FDP). There is a strong history of coalition Governments in Germany with all parties experienced in getting a majority of 368 seats over the line. The SPD were previously in a grand coalition with Angela Merkel’s Christian Democratic Union (CDU) for the last four years, however, now that Merkel has moved on, SPD leader Olaf Scholz has suggested the SPD will not do a Grand Coalition with the CDU. Talks in the past have not always been easy and with the Greens having 14.8% of the vote and the SPD having 26%, they can still command some privileges.

The Euro last week looked to be losing ground as it fell to a 14-month low against the US Dollar, whilst trading by the end of the week at 1.17 against Sterling. This week is busy for the Eurozone with multiple data releases throughout the week. PMI Services data will be released tomorrow for several countries across Europe along with the main Eurozone reading. This will provide an insight into the thoughts of executives across the services sector and their sentiment moving forward.  

On Wednesday the latest Retail Sales will be released for September with a 0.4% increase expected. This is significantly less than the 3.4% we saw from August to September. Data in the Eurozone is very key now and depending on economic performance the European Central Bank (ECB) will make its decision on policy changes. The ECB is considering whether they will start to taper their comprehensive stimulus program and retail sales data is something they will consider as a sentiment gauge. Following the pandemic, continuous improvement in the economy is vital and if consumer spending starts to fall this suggests that what the ECB are looking for may not come fast enough. 

Concerns Over US Government Funds Continue

The US Senate has an estimated 14 days until there is a belief that the money will run out for the Government. Treasury Secretary Janet Yellen, who was the former Chairwoman of the Federal Reserve has pinpointed 18 October as the day of reckoning where the US Government would default on their debts.

In quite a complicated series of events, the US Senate agreed that through the Pandemic there would be no debt ceiling to allow the Government to provide funding where it needed it, however on 1 August the debt ceiling was reintroduced at a mere $26.4tn. Yellen has now made the demand to the Senate that unless the ceiling is raised or removed the US will default on the interest they pay for that money.

One of the challenges for Yellen and President Biden is they only just tip the balance in the Senate assuming everyone votes on party lines. When it comes to debt levels it is quite common for people to have a difference of opinion on what they believe is appropriate. If the Senate which has a 50/50 split, just tipped by Vice President Kamala Harris can’t decide on what to do a default is inevitable.

There would however be significant consequences for the Government if they do run out of money. There will be millions of job losses as the Government wouldn’t be able to continue with its commitments. Amenities would shut and vital support for the vulnerable would be turned off. There would no doubt be a major market sell-off as the US Government admit they have no money which would cause panic. The main thing to watch is how much the Republicans make the Democrats sweat in the Senate and what would happen if they negotiated in return for helping Biden and Yellen get a resolution through. Much like we have seen with Brexit coming down to the 11th hour, this one could go all the way so expect serious US Dollar volatility and general market uncertainty for the next 14 days until a resolution or default take place.  

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