Stagflation sterling’s latest contender (GBP)

The pound (GBP) has suffered a great knock to its confidence this week with no one knowing which crisis to blame when. Whether it’s the energy crisis, the supply chain crisis, the labour market crisis, or the Covid crisis – or whether any distinction is even required due to the interrelatedness of the lot – there has been plenty to add to sterling’s (GBP) panic.

The factors putting downward pressure on the pound (GBP) really set in yesterday morning and didn’t let up, sliding into further trouble throughout the day and hitting an eight-month low against the remarkably strong US dollar (USD). For this drop, a “stagflation” crisis is to blame – the unpleasant mix of rising prices and slowing growth, which threatens household spending just as the furlough scheme comes to an end today. With an estimated 1 million people receiving income through the scheme, a rise in unemployment and a further knock to spending is expected.

In some positive news for the pound (GBP), UK GDP released today shows a 5.5% rise in Q2, up from a preliminary estimate of 4.8% growth, with the ONS figures citing a 7.9% jump in pent-up household spending from April to June.

Eurozone economic sentiment upbeat (EUR)

Speaking at the ECB Forum on Central Banking yesterday, President Christine Lagarde said that Eurozone activity is predicted to return to pre-pandemic levels by the end of the year, with issues surrounding supply chain bottlenecks, labour market shortages and rising energy prices fading throughout the first half of 2022.

The upbeat narrative comes despite the slew of worrying economic headlines from the Eurozone, focusing instead on the unexpected rise in economic sentiment in September, detailed by the European Commission. The index, which measures business and consumer confidence, was forecast to come in at 116.5 but exceeded expectations by reaching 117.8 in September, up from 117.6 in August.

The euro (EUR) might have to play the long game to see many green shoots appear, and for the moment, much like the pound (GBP), it remains at the mercy of the dominant – though slightly retreating – US dollar (USD) after yesterday’s plunge.

A break in the rally (USD)

The US dollar appears to be taking a breather following a raging rally that had it dominating the currency markets this week. The break in the rally and the slight lowering of the US dollar has given some of the major currencies, including the pound (GBP) and the euro (EUR), the chance to pare some of their losses from the week. The recovery is minimal, however, and the dollar’s (USD) surge could be a mere hiatus.

One factor contributing to the dollar’s (USD) sentiment is the confirmed avoidance of an imminent government shutdown. US Congress is expected to approve legislation that would fund the federal government until 3^rd December at the earliest, with a short-term extension on government spending. Meanwhile, Democrats are still working to get President Biden’s policies through Congress, including a bipartisan infrastructure bill that contains $550 billion in new spending for roads, bridges, broadband and other priorities, as well as a $3.5 trillion slate of social, health and environmental programs. Later today come US unemployment figures.