September 2022

GBP
The Pound experienced extreme volatility on Friday after the release of Kwarteng’s ‘Mini-Budget’. The market reacted negatively to the Tax-Cuts, meant to incentivise growth in the UK. Unfortunately, the bad news doesn’t stop there, as Sterling hit an all-time low against the USD as trading began this morning dropping a total of 75 since the markets opened on Thursday. A similar trend can be seen with GBP/EUR, as the Pound continues to weaken against the Euro this morning. The reduced confidence in Sterling is backed by Kwarteng’s statement on Sunday informing the UK that he would be pursuing more Tax Cuts.

EUR
The Euro has fallen against the strength of the US Dollar Since trading began on Friday. The gain against Pound Sterling can be tied to investors pulling funds out of the UK and reinvesting them abroad. ECB President Lagarde is expected to speak for the next three days – along with other ECB members – bringing added volatility to the Euro. German retail sales are released on Friday morning, before Eurozone HICP (a measure of changes in the price of goods and services) in the afternoon, both of which could stimulate end-of-week volatility.

USD: The Dollar has seen a huge increase in strength against both GBP & EUR. As the US continues to increase Interest rates and tow the line between Recession & inflation, the dollar remains King. US Treasury Bonds have continued to soar with the prospect of additional interest rate hikes from the FED. The added confidence in the greenback has seen the Safe-haven currency climb to a new two-decade high against a basket of major currencies – and an all-time high vs GBP.

Markets started September on a strong note, with major global indices closing the first week in the green. An additional push in positive market sentiment has been the most recent development in Eastern Europe: in fact, this weekend served as a reminder of the ongoing and changing nature of the Russia-Ukraine war.

Nonetheless, whether the strong start to the month was just a market positioning adjustment or the sign of anything more sustained will be on watch this week, especially as a new set of inflation reports comes out. In fact, a bevvy of consumer price index (CPI) reports for August come out this week: Germany, Spain, and the U.S. all release on Tuesday, the U.K. releases its report on Wednesday, France releases its report on Thursday, and Italy and the Eurozone as a whole release theirs on Friday.

GBP
The Bank of England, whose meeting was due this week, postponed its interest rate decision last Friday in the wake of Queen Elizabeth II’s passing. It’s the first delay to a monetary policy meeting since the central bank became operationally independent 25 years ago. Moreover, the central bank faces a more fluctuating environment with new Prime Minister Liz Truss in charge and already having issued a major energy plan. Its effect on the market is among the things the BOE will have to weigh. Nonetheless, postponing their interest rate decision would allow policy setters to gather more economic data. In fact, having witnessed a contraction of 0.6% in economic activities during June 2022, market players will be interested in July’s monthly GDP figures to confirm the recently hawkish hopes from the Bank of England. Forecasts suggest that the UK GDP will reverse the previous drop with 0.5% MoM in July. Meanwhile, Manufacturing Production, which makes up around 80% of total industrial production, is expected to improve to 0.6% MoM in July.

EUR
European stock markets are expected to open with modest gains today, continuing the positive trend seen at the end of last week, helped by the substantial territorial gains made by Ukrainian troops over the weekend. Ukraine has retaken more than 3,000 sq. km this month, with most of this ground being taken thanks to a rapid weekend offensive that forced Russia to abandon its main logistics hub in the Kharkiv region. After months of stalemate, these swift manoeuvres will give the markets room to reconsider the range of outcomes. Prolonged attrition remains one option, but an earlier-than-expected end to the conflict has entered the equation. Ultimately, European markets closed last week with healthy gains as September started on a positive note, and this tone is expected to continue.

USD
The main point of focus this week is U.S. consumer price inflation data due on Tuesday, which is largely expected to dictate the path of the dollar in the near term. Markets are expecting inflation to retreat further from highs hit earlier this year, helped largely by easing fuel prices. Nonetheless, the reading is still expected to be well above the Federal Reserve’s annual target of 2%. Ultimately, this could give the Federal Reserve food for thought ahead of next week’s policy-setting meeting, with the U.S. central bank expected to deliver its third consecutive rate increase of 75 basis points in an attempt to curb this high inflation.

Queen Elizabeth II, the longest reigning monarch in British history who had recently celebrated her platinum Jubilee this year, marking 70 years on the throne, has peacefully died aged 96, Buckingham Palace announced on Thursday. Following her death, the Queen’s eldest son Charles, the former Prince of Wales, will become King in a formal ceremony in London and lead mourning services across the United Kingdom.

‘Her legacy will loom large in the pages of British history, and in the story of our world’ – Joe Biden

European and UK stock markets are expected to open sharply lower today, as investors fret over the economic risks facing the region, including geopolitical developments, further energy shortages, and slowing growth coupled with soaring inflation.

In fact, the escalating energy row between Moscow and the West is set to occupy investors’ attention in the week ahead after Moscow vowed to keep its main gas pipeline to Germany shut. Nonetheless, UK political development will most likely be under the spotlight in the first half of the week as Monday and Tuesday will see the announcement and appointment of the UK’s new prime minister. Additionally, the European Central Bank and Christine Lagarde are set to deliver a big rate hike on Thursday whereas Federal Reserve Chair Jerome Powell is due to make an appearance before the central bank goes into its blackout period before its next meeting at the end of the month.

GBP
The UK prepares for an important day today as the Conservative Party will unveil their new leader, with Liz Truss being the overwhelming favourite. Whereas tomorrow, Tuesday 6th September, the new PM will officially take office after being appointed by the Queen to succeed Boris Johnson. Their roadmap to the UK’s current economic headwinds will be key: extra support for businesses and households will be of utmost importance with Brexit issues also expected to return to the forefront if Truss wins. Nonetheless, Ahead of the Tory party’s leadership announcement, there will be some financial news releases. In fact, investors will be looking for more meat on the bone in terms of commentary on current trading and the outlook for the rest of 2022. UK services sector PMI data will be of interest, mid-morning, but may be drowned out by the headlines from Westminster.

EUR
The Euro seems set for a very volatile and turbulent week losing ground in early trading hours this morning. The standoff over Russian gas and oil exports escalated Friday after Moscow vowed to keep its main gas supply pipeline to Germany shuttered. The latest Nord Stream pipeline shutdown, which Russia says will last for as long as it takes to carry out repairs, added to fears of winter gas shortages that could pull major economies into recession and lead to energy rationing. The latest development has seen the euro fall below 99 cents to the dollar for the first time in over two decades. Europe has accused Russia of weaponizing energy supplies in what Moscow has called an “economic war”. Nonetheless, Moscow blames Western sanctions and technical issues for supply disruptions. Ultimately, the European Commission has warned that a full cut-off of Russian gas supplies to Europe, if combined with a cold winter, could reduce GDP across the European Union by as much as 1.5% if countries did not prepare in advance.

USD
Concluding last week’s stretch of US economic data was the release of the monthly employment report: Non-Farm Payrolls. Friday’s employment report for August was a mixed bag – while the economy added more jobs than expected, wage growth moderated and the unemployment rate ticked higher. In fact, non-farm payrolls rose by 315,000 through the middle of the month, a slowdown from July’s 526,000 but clearly ahead of consensus forecasts for a 300,000 gain. Wage growth also eased by more than expected, with average hourly earnings rising only 0.3% rather than the 0.4% expected. As such, the annual rate of earnings growth stayed at 5.2%, well below the current rate of inflation. Ultimately, the mixed reading keeps alive the ongoing debate over the size of the next Fed hike. Nonetheless, expectations for aggressive Fed action have solidified since the hawkish speech by Powell at the Fed’s Jackson Hole conference last month.