Ellie Allen

Pound Under Pressure as Risk Aversion Takes Hold

6 min read


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The Pound was held back during August as concerns over the spread of the Covid-19 Delta variant saw traders back safe haven currencies. At the same time, an increased perception of geopolitical risk caused by events unfolding in Afghanistan added to the safety seeking mood, causing Sterling to struggle against the US Dollar. Mid-month the GBP/USD exchange rate hit a low of $1.36, before recovering again towards the end of the month, rising to $1.39.

Worries about the UK economy came to the fore once again when the latest figures revealed the activity in the services sector had fallen to a six-month low due to a cocktail of causes. The UK Services PMI slipped to 55, down sharply from 59.6 in July and 62.9 in June. A lack of available lorry drivers on the roads, as well as staff shortages and supply chain disruptions has led to backlogs and missed orders. At the same time, a slowdown in factory activity was reported for much the same reasons.

Meanwhile the Bank of England (BoE) struck a slightly more hawkish tone, briefly sending the Pound to an 18-month high of €1.18 against the Euro, although it fell back again later in the month. Poor economic data helped to turn this situation around as it was revealed retail sales slipped and inflation similarly followed suit, falling back within the BoE’s 2 percent target range.

By the start of this month, pressure was continuing to mount on the Pound, as the service sector problems were compounded by the ongoing fallout from Brexit. Economists are now concerned that the combination of supply shortages, rising commodity prices, higher energy prices and spiralling wage bills will cause a spike in retail price inflation, leading to a downturn in consumer spending.


The US currency raced higher over the course of August as heightened global risk saw a move towards safe havens. The chaotic situation in Afghanistan, combined with the ongoing spread of the Delta variant saw markets eschew risk and move into currencies such as the Japanese Yen and the US Dollar. The Greenback benefited from this despite some poor economic data. There were some disappointing jobs statistics published at the start of September, when it was revealed only 235,000 positions were created in August – a figure that was far below expectations. This was all the more surprising following July’s figure, which was over 900,000, wrong-footing economists who had modelled for sustained jobs growth.

Blame for the lack of new positions was pinned firmly on the Delta variant, with concern mounting that the disappointing miss is a harbinger of a slowdown in economic activity. At the same time, consumer inflation clocked above 5 percent for the second month in a row, causing concern that spending will now be reined in and GDP growth will be hit.

The Federal Reserve failed to offer any support, and there was no sign of the kind of bullish talk on interest rate rises that many traders had been expecting. At the same time, the Jackson Hole Symposium of central banks wrapped up, with many USD investors disappointed by the lack of clarity on forward guidance coming out of the conference. Nevertheless, bullish talk of tapering asset purchases earlier in the month proved more than enough to spur the Greenback higher. It could have gone higher had Fed chair Jerome Powell not sounded so dovish at Jackson Hole, saying that the US economic recovery was an ongoing project, dampening any hopes of a rise in interest rates. Instead, focus would be on getting to full employment, he insisted, and the Federal Reserve was in no hurry to wind down its bond buying programme.


As the US Dollar soared, its main rival the Euro found itself on the backfoot. All the talk about tapering asset purchases in the US saw the single currency fall from favour in the EUR/USD pairing. Another factor to undermine the single currency was the general risk-off sentiment affecting markets as a reaction to spiralling geopolitical angst. Surging cases of the Covid-19 Delta variant on the European continent also had markets worried, making it difficult for the Euro to make any headway on FX markets.

Eurozone inflation was making headlines again, with soaring prices beginning to concern European Central Bank (ECB) policymakers. The Eurozone saw inflation clock a 3 percent rise in August, following on from a 2.7 percent increase in July – far above the ECB’s 2 percent target. Increases were fuelled by soaring food and energy prices, as well as the cost of commodities used by industry. As a result, the ECB is coming under pressure to adjust its inflation target, although the bank continues to insist that the price spike is a transitory phenomenon, and that inflation will fall back to around 1 percent in 2022.

The GBP/EUR exchange rate remained steady for the first half of the month, but fell back in the second half, moving from €1.18 to €1.17. Dampened economic sentiment in the Eurozone was one factor holding the single currency back against the Pound, with businesses and consumers concerned that any increase in the rate of Delta infections would cause economy-crushing lockdown restrictions to re-emerge.


The Australian Dollar fell to multi-month lows on currency markets in August as many of the county’s metropolitan areas went into severe lockdowns. Due to more Delta variant cases being discovered both Sydney and Melbourne were placed into lockdown, as well as other parts of the country. The economic ramifications have not yet become clear, but a clear message has been sent to AUD investors to expect consequences for the nation’s Q2 GDP figures.

AUD/USD fell to a nine-month low, although the Australian Dollar did fare better against the Pound, with GBP/AUD actually slipping a cent to AU$1.88. There was slightly better news in the form of the latest unemployment statistics, which showed a slight improvement. The jobless rate fell to 4.6 percent, although this was offset by sharp declines in business and consumer sentiment.


In the UK, the ongoing supply chain issues and the spread of the Delta variant will likely be among the main variables driving the strength of the Pound. A lack of lorry drivers, service sector staff and agricultural workers threatens the UK with a ‘perfect storm’. As warnings of a ‘turkeyless Christmas’ start to worry consumers, the possibility of food shortages is a dark cloud on the horizon. With large numbers of EU-based drivers, food pickers and processing staff choosing to remain in their home countries rather than face red tape, Covid restrictions and difficult conditions in the UK market, attention will be focused on the British government and its policy measures aimed at alleviating the situation.

While the Eurozone is similarly affected by supply shortages and issues surrounding the Delta variant, another wildcard in the form of the German federal election seems certain to add to the sense of unpredictability. The nationwide election is expected to be held on 26 September and will decide who will sit in the Bundestag. 0Long-term incumbent chancellor, Angela Merkel, will not stand for re-election, meaning Germany will move into a new era. Political analysts expect there to be no overall winner, and there is a possibility three parties will have to form a coalition to rule. The political turbulence caused by the inevitably hardball negotiations has the possibility to negatively impact the Euro.

Levels of global risk appetite will likely remain a key driver of the US Dollar in September, yet there is another factor to look out for in the form of the Federal Reserve. With all recent talk being about tapering stimulus measures, there is likely to be an amplification of interest in the subject during September. Fed Chair Jerome Powell has already indicated that the bank is in no rush to raise interest rates, but having previously promised to cut the level of support in the form of purchases of bonds and other assets, markets are increasingly strident in their demand to know exactly how and when that will be done. Any bullish talk from the Fed, in this respect, will almost certainly bolster the already-strong Greenback.

Finally, for the Australian Dollar focus is also likely to remain on the country’s national bank. The Reserve Bank of Australia’s (RBA) next policy move has the potential to move AUD significantly if it maintains its ‘wait and see’ approach to further stimulus measures. With growth likely to be hit by the latest lockdowns, the RBA had previously said it expected a quick recovery – a situation which could now be threatened unless measures are taken to bolster the Australian economy.

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