Sterling on back foot after concerns over Article 16 trigger speculation
Tuesday 30 August, 2022
Daily Currency UpdateUK prime minister candidate, Liz Truss, has stated she is considering triggering Article 16 over Northern Ireland protocol within days of becoming PM, if she wins the race. This would provide a stop-gap while the legislation to unilaterally rewrite the protocol passes through the House of Commons, which isn't expected to happen for roughly a year's time. This could provide further uncertainty around the current Brexit arrangements and has bought further uncertainty for the pound, which is lower versus both the Euro and the US Dollar.
The UK will announce its financial commitment for a new nuclear plant, Sizewell C, as it seeks to boost long-term energy security. In the meantime, the UK's new PM is set to unveil help for households with their energy bills within days of taking office, the Telegraph said.
Headlines have come out from the leading global investment bank, Goldman Sachs, stating that inflation in the UK could hit 22% next year, with spiralling gas prices set to remain higher for longer. The UK could be forced to raise its energy cap by a further 80% if this was the case. If this outcome were to materlialise, UK GDP could fall by as much as 4% next year. This news is also the reason for Sterling's fall today.
Key MoversLast week's Jackson Hole symposium in the US provided much for the markets to digest. It was the perfect place for Federal Reserve Chairman Jerome Powell to regain credibility and address structural shifts. However, everyone who had been hoping for a Fed pivot soon was disappointed last Friday. Powell's much-anticipated speech at Jackson Hole was loud and clear, stating that the central bank is comfortable with higher interest rates for longer, to combat the rising inflation. Powell's efforts to keep inflation expectations under control were on full display, and he even seemed to be aligned with Paul Volcker. Volcker was Fed Chair from 1979 to 1987. He led the Fed rate hike to a peak of 20% in June 1981, which led to the 1980-82 recession in the US.
Powell emphasised that the Fed won't stop the fight against inflation until it decreases to 2%. He inferred that if the economy and equity markets take a hit, it will not change anything - the Fed will keep raising rates. This was seen as US Dollar positive, with the week ending with the US Dollar on the front foot once again.
However, the question now is how low the EURUSD pair can go. Currently, the drivers in Europe are pessimistic; for example, there is greater evidence of stagflation and rising concerns over winter gas supplies. Even a hefty hike when the ECB meets on September 8 may not be enough for the EURUSD to change its trend.
- GBP/USD: 1.1635 - 1.1715 ▼
- GBP/EUR: 1.1590 - 1.1685 ▼
- GBP/AUD: 1.6870 - 1.7055 ▲
- EUR/USD: 0.9975 - 1.0055 ▼