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Pound reaches lowest point versus US dollar

Tuesday 27 September, 2022

Daily Currency Update

Major media outlets are focusing on the collapsing pound at the moment, as foreign exchange hits major headlines across the UK. The pound is now at its lowest point versus the US dollar ever. On Monday, we saw the currency pair hit 1.0350 briefly, as ongoing concerns around inflation and policymakers’ ability to control it take centre stage. The real life consequence of the record lows can be seen by the reaction of mortgage lenders with Halifax (the UK’s largest mortgage provider) having now withdrawn lending products in order to reprice due to the market volatility and the uncertainty caused by the mini-budget implemented last week by Kwasi Kwarteng. Focus now moves to what fiscal and monetary policy changes the UK has at its disposal. Whether the Bank of England now implements an emergency interest rate hike, or the UK government is forced to go to the IMF to request a Flexible Credit Line, is yet to be seen. There is even talks of potential Capital Controls, something which Russia recently employed to control the crumbling Rouble recently. There is also the potential option of the UK central bank intervening in the FX markets to artificially prop up the pound. As a net importing nation, a pound this weak is incredibly damaging for UK businesses, many of whom import from the likes of Europe and the Far East. Businesses have already been hit very hard by increasing energy costs and increasing supply chain costs since Covid. There are many analysts in the market calling for the pound to fall further and there are talks of a ‘run on sterling’ and sterling based assets, which could send the pair below parity, though the markets will be now watching for close signs on what the UK government and Bank of England will do to support the ailing currency. This could instead provide much needed support in the coming days.

Key Movers

Russia’s plan to deploy more troops around Ukraine also exerted downside pressure on the GBP/USD rate, as the dollar continues to dominate during times of global risk aversion. Amid these plays, S&P 500 Futures dropped half a percent whilst the US 10-year Treasury yields added four basis points to 3.74%. Some market news is also focusing on risk aversion caused tensions between Japan and Russia. Japan has stopped chemical supplies to Russia whilst Russia has accused a Japanese consul of spying which they forced out the country and Tokyo hints at retaliation. US consumer confidence posts today and is likely to illustrate that the real economic environment remains robust stateside, allowing the Federal Reserve plenty of room to raise interest rates which could further support the US dollar. The dollar seems to be in an environment of win-win at the moment, with risk aversion and interest rate hike expectations in the US all supporting it. This morning there are headlines coming from the Sweden’s Maritime Authority stating it had issued a warning of two leaks on the Nord Stream 1 pipeline in Swedish and Danish waters. There is speculation that there could be some evidence of sabotage here. This would do little to stem the tide of risk aversion if true and could further support the US dollar.  

Expected Ranges

  • GBP/USD: 1.0635 – 1.0945 ▼
  • GBP/EUR: 1.1070 – 1.1285 ▼
  • GBP/AUD: 1.6470 – 1.6710 ▼
  • EUR/USD: 0.9475 – 0.9865 ▼