Cautiousness persists – Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

It has been a particularly difficult month for the pound, with sterling suffering its most extensive declines since this time last year, after the ill-fated Truss/Kwarteng ‘mini budget’ had inflicted heavy losses for the pound and broader UK asset prices. GBP/USD has seen particularly extended declines as a result of the strong dollar, at one point slipping roughly 4% during September from over 1.2700, to a six-month low of just above 1.2100.

Only a sudden reversal in risk sentiment helped to send the pound back over 1.2200 on Thursday afternoon (against USD). Elsewhere, GBP/JPY has also moved notably lower over the period, despite the BoJ maintaining their ultra-low interest rate policy throughout this period, which has weighed heavily on the yen. GBP/EUR has perhaps been the one outlier, rising back over 1.1550 toward the end of the week.

Aside from that strong dollar, the broader declines for the pound have been fuelled by the BoE’s decision to maintain its key interest rate at 5.25% last week after such a long period of rate hikes, and with market-implied expectations for further BoE hikes subsequently diminishing and clearly feeding into the weaker sterling narrative.

Incoming data has been fairly limited throughout this week; however, the UK housing market continues to wobble under the impact of those cumulative BoE rate hikes, with Zoopla suggesting London sellers are having to accept discounts of  greater than 5% in a bid to secure sales. That represents the highest average discount since early 2019. The Halifax will be releasing their latest update on the UK house market next week. There was some better news on the growth front, with the latest GDP update slightly beating analyst estimates and increasing by a respectable 0.6% during Q2 on an annual basis, having been expected to have increased by 0.4% over the period.

GBP PMI surveys are due for release next week.

EUR

There was some good news from Germany this week, with confirmation that inflation has now dropped to its lowest level for two-years. The German harmonized index of CPI fell from 6.4% in August to a healthier 4.3% during September, coming in under the 4.5% market expectation. Whilst Spanish inflation may have increased for the second month in a row, it remains at 3.2% overall. Regional inflation was released this morning (Friday) and confirmed inflation has dropped from 5.3% to 4.5% – its lowest level in 2 years. In other news, the latest German IFO survey also beat expectations across the board, with the overall Business Climate, Current Assessment and (future) Expectations all surpassing estimates.

It’s possible that the positive news on inflation will increase the prospects that the ECB will pause Euro area rate hikes at their next meeting, despite the recent rises in energy prices potentially impacting headline inflation.

EUR/USD has now fallen by around 4% throughout the past two months, with the pair reaching a low of 1.0500, a level last tested back in March. However, the sudden increase in risk appetite yesterday (Thursday) afternoon may have helped to put a short-term line in the sand for the single currency. The latest regional Retail Sales data is the main highlight among incoming economic data next week.