Georgina Clissold

Pound Under Pressure As Supply-Chain Crisis Worsens


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The Pound fared worse for much of September as concerns over supply-chain issues and the deepening energy crisis in the UK did little to support the appeal of Sterling exchange rates. More so, risk-off trade pushed investors towards safe-haven currencies like the US Dollar. Mid-month the GBP/USD exchange rate found itself steady around the $1.38 level, before slipping towards $1.37 as the month closed.

Worries surrounding the UK economy persisted throughout the month, as latest preliminary figures from IHS Markit PMI revealed that growth in the Manufacturing and Services sector in the UK had slowed to a 7-month low. As revealed by IHS Markit in their latest flash Manufacturing figures for September, ‘the rate of growth in output slowed for the fourth month running and was muted, with material shortages the main factor constraining the pace of expansion’.

Though the Bank of England (BoE) struck a more dovish tone at the latest interest rate decision towards the end of September, the Pound was able to briefly push higher across the board as investors became more confident that the bank will raise interest rates as early as March 2022. The bank did choose to change its economic growth projections for the third quarter of the year on the back of ongoing supply-chain issues.

By the end of the month the energy crisis in the UK was putting mounting pressure on the Pound. Economists are not only concerned over the energy crisis, but also the ongoing supply-chain problems that have seen BP and Esso closing petrol stations due to a lack of HGV drivers available to deliver their goods. This in turn, has led to panic-buying across the UK, a problem that could worsen in the run-up to Christmas.

US DOLLAR STEADY ON SAFE HAVEN DEMAND THOUGH ECONOMIC GROWTH CONCERNS REMAIN

The US Dollar found itself muted over the course of September, though it managed to hold onto its gains from August on the back of heightened risk-off trade. Limiting any major gains for the ‘Greenback’ however, was a lacklustre inflation reading from the US. Although inflation remains near an all-time high of 5.4% recorded during July, August’s inflation reading began to show a slowdown in consumer prices, worrying investors that the recent rise in inflation has been transitory as outlined by the Federal Reserve. Towards the end of the month, a better-than-expected retail sales reading from the US provided additional support for USD exchange rates.

Retail sales rose 0.7% during August, beating market forecasts of a -0.8% contraction, as consumers were not fazed by the widespread presence of the delta variant of coronavirus. However, initial US jobless claims hit their highest level in a month as the labour market started to falter.

At the Federal Reserve's interest rate decision, policymakers gave their strongest hint yet that interest rates could rise sooner than expected and that the bank would begin tapering its bond-buying at the end of the year. The slight hawkish tone from Fed Chair Jerome Powell was enough to keep the US Dollar broadly appealing. The US Dollar could have found itself pushing even higher across the board if it weren’t for the bank's comments that the country’s economic recovery has begun to slow. A report from the Federal Open Meeting Committee (FOMC) read: The sectors most adversely affected by the pandemic have improved in recent months, but the rise in Covid-19 cases has slowed their recovery. Inflation is elevated, largely reflecting transitory factors. Overall, financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses.

EURO WRESTLES WITH SURGING DOLLAR AND DELTA VARIANT CONCERN

As the US Dollar was able to hold onto most of its positive footing, its main rival the Euro found itself on the backfoot for much of September. It comes as a prevailing risk-off market mood pushed investors towards the safe-haven ‘Greenback’, and in turn limited the single currency. The Euro was able to find little support from the broad weakness in the Pound, although a range of disappointing economic data from the Eurozone meant that the Euro was unable to propel itself higher.

A further fall in flash PMI figures from across the Eurozone revealed that growth in the bloc continues to slow as lingering concerns over rising coronavirus cases adds worry to investors and markets alike. Eurozone inflation remained way above the European Central Bank’s (ECB) target at 3% during September, as the latest interest rate decision from the bank saw monetary policy kept unchanged. Though, policymakers did choose to slow the pace of its bond-buying programme. The bank remains under increasing pressure to raise its inflation targets moving forward.

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 €1.15. Weakening economic sentiment in the Eurozone was one factor holding the single currency back against the Pound, though if supply-chain issues continue to dampen Sterling, the Euro could find some additional support and push higher towards the end of the year.

AUSTRALIAN DOLLAR CONTINUES TO BATTLE STIFLING RISK APPETITE AND ONGOING CORONAVIRUS OUTBREAK

The Australian Dollar slid further across the board during September, as the ongoing coronavirus outbreak in Australia continues to limit the appeal of the risk-correlated ‘Aussie’. A further 135,000 Australians in the state of Sydney were thrust into a 7-day lockdown following a positive case in the community. However, Australia has now immunised half of its population, a move that could see lockdowns begin to be eased.

AUD/USD remained near a 9-month low. In addition, the Australian Dollar struggled against the Pound, with GBP/AUD hovering around the AU$1.88 level. Flash PMI figures from Australia revealed growth in the economy, whilst the services PMI remains in contraction territory, the figures look to be a move in the right direction.

WHAT TO LOOK OUT FOR IN OCTOBER

In the UK, ongoing supply chain and fuel issues, alongside a rise in coronavirus cases, will likely be among the main variables driving the current weakness in the Pound. A lack of lorry drivers across the UK has seen 27% of fuel stations without petrol and diesel, a problem which could continue for at least a month. As supply-chain issues dominate the news, many seem to have forgotten the ongoing energy crisis. These factors look to weigh on the appeal of the Pound, and the UK Government, who may be forced to step in before the crisis deepens more than it already has.

While the Eurozone remains affected by its own supply shortages and issues surrounding the coronavirus - as the delta variant of the virus remains dominant across the bloc - inflation figures look to be eyed by investors during October. If Eurozone inflation rises further - or stands above the ECB’s inflation target of 2% - the ECB may be forced to up its target or raise interest rates sooner than first expected.

The global market mood will be the main driver of movement in the US Dollar throughout October, though a range of economic data could be the difference between the ‘Greenback’ performing averagely or strengthening across the board. If the global economic recovery from coronavirus speeds up however, the US Dollar may begin to struggle. The middle of October will see the release of the latest Federal Open Market Committee (FOMC) meeting minutes, which could give an indication into how the Federal Reserve will move in their next policy meeting at the start of November.

Finally, the Australian Dollar’s focus is likely to remain on the lockdown restrictions across Australia. Before the current coronavirus outbreak, the Reserve Bank of Australia (RBA) were optimistic for a fast recovery from the pandemic. But, as growth continues to be hit as coronavirus cases are unable to be contained, Australian struggles to reinforce lockdown restrictions, the bank may have to continue its bond-buying programme for longer than expected.

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