ACM Update 06-09-22

ACM FX Snapshot 06-09-22

- Cable (Sterling/Dollar) traded in the 1.14s in Monday trading. The pair has since rebounded post the announcement of Liz Truss as PM. Indeed, talk of a substantial fiscal package to cap household energy bills has eased recession concerns giving some upside to Sterling. Does GBP move higher from here or do risks remain to the downside? The potential fiscal package will be keeping the bond market busy due to the increased level of risk of investors dumping Government debt due to the seemingly ever-growing debt burden of UK PLC.

- Sterling/Dollar is down 14% this year and over 4% in August alone. The dollar (investors still flock to it largely because there’s nowhere else to go) should continue to be aided by the Fed outlook on rates. Couple this with the energy crisis, contraction in UK manufacturing, rising UK import prices (a weaker currency causing inflation and dragging us into a self-perpetuating downward move in GBP) and debate over the speed and effectiveness of rate rises and I see further downside risk for GBP/USD.

- If you hold USD and need to move into GBP consider locking in the recent gains made in August. I do think there is further upside to be had through take profit orders although it may be prudent to take some risk off the table at current levels. Please reach out to the Aston team to discuss your specific requirements.

You can view the recent movements in Sterling/Dollar in the graph below –

Sterling/Euro

- Trading in the 1.16s and is slogging it out in the middle of the boxing ring. Will there be a clear winner by end of year, or will we see it go the distance? I’m expecting Sterling/Euro to largely cancel each other out.

- The Euro has pared some of the losses yesterday on talk of greater unity between France and Germany around energy pricing/liquidity injection to utility companies. Huge price swings in markets are meaning more margin calls and greater collateral to be posted. Could there be a Lehman’s moment in the energy markets? I don’t think it’ll happen although the way we think and pay for energy has undoubtedly changed forever.

You can view the recent movements in Sterling/Euro in the graph below –

- The ECB (European Central Bank) are expected to raise rates by 75bps to counter surging inflation. Prices rose by 9.1% in August.

- Growth forecasts are expected to be cut and inflation forecasts raised as higher energy prices with the closure of pipelines leading to a real risk of recession.

- Increased rates in the Eurozone could have a damaging effect on southern economies with higher debt burdens to service. The proverbial tightrope is being walked again.

- If you have a Euro exposure, please reach out to the Aston team and we can guide you through some options to hedge your risk.

Any questions please let me know