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Sterling on the back foot after inflation concerns heighten

Wednesday 31 August, 2022

Daily Currency Update

Overnight, Sterling was holding a slightly softer tone, while the euro was somewhat on the front foot. Comments from Goldman Sachs' chief analyst stating that inflation in the UK could hit 22% next year, with spiralling gas prices set to remain higher for longer, did little to support the pound. The UK could be forced to raise its energy cap by a further 80% if this was the case. UK prime minister candidate, Liz Truss, has stated that 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 brought further uncertainty for the pound, which is lower versus both the euro and the US dollar.

Key Movers

Last 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 address structural shifts. However, those who had been hoping for a Fed pivot soon were 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 rising inflation. 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 could 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.

Expected Ranges

  • GBP/USD: 1.1620 - 1.1710 ▼
  • GBP/EUR: 1.1580 - 1.1675 ▼
  • GBP/AUD: 1.6870 - 1.7175 ▲
  • EUR/USD: 0.9870 - 1.0010 ▼