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Over the course of September, the Pound found itself sinking lower before rallying again in the last week and clawing back some of its losses. These losses were greatest against the US Dollar, with Sterling losing almost 4.5 percent in September. Losses against the Euro were not as severe, although the Pound did slip against the Australian Dollar, which was devaluing on FX markets as risk appetite dried up. The main driver for these Sterling losses was, once again, Brexit fears, with traders deciding the likelihood of there being a post-Brexit trade deal looking slimmer by the day.

UK ECONOMY CONCERNS STERLING INVESTORS AS RECOVERY FALTERS: BoE ECONOMIST WARNS AGAINST “CHICKEN LICKEN” PESSIMISM

The latest set of UK PMI business surveys showed that the economy is starting to lose momentum. Figures showed the IHS Markit flash composite PMI fell to 55.7 in September from 59.1 in August, with individual sectors also slowing. Faltering economic activity is concerning to Sterling investors as it had been hoped that delayed demand would power economic activity higher.

The Bank of England did not help GBP demand when it was reported that it was considering experimenting with negative interest rates – something it swiftly played down. Later, the BoE’s Andy Haldane criticised downbeat media reports about the UK economy, referencing a children’s book character and saying, “Now is not the time for the economics of Chicken Licken.”

There was also some concerning news of the jobs front, with redundancies rising at their fastest rate since 2009. As many as 695,000 people have lost their jobs since March, with TSB and Shell being the latest to announce mass layoffs. With the employment furlough scheme coming to end in October, Chancellor Rishi Sunak tried to offer some support in the form of income support to those who had ‘viable’ jobs. Whether this will stem the flow of redundancies remains to be seen.

Nevertheless, there were some bright spots among the UK economic data releases, with retail sales soaring to above pre-pandemic levels, house prices gaining strongly, and mortgage approvals hitting their highest level since 2007. Despite these glimmers, investors chose instead to focus on the Brexit process, and in the end this proved to be the salient driving factor behind Sterling’s downward drift.

US DOLLAR PUTS IN STRONG PERFORMANCE AS INVESTORS SEEK SAFE HAVENS September saw a rise in demand for risk-off trades across currency markets, primarily driven by fears that a second wave of Covid-19 infections would hammer world trade and national economies. The US Dollar benefitted from this, with the DXY index rising from 92 to 94 over the course of the month.

Also benefitting USD was the first of three televised debates ahead of the November presidential election, with incumbent President Trump going up against his challenger the Democrat Joe Biden. In what proved to be a bad-tempered exchange between the two, no clear winner emerged, leaving traders uncertain about how the election will pan out, and the possibility of a contested vote adding to risk fears. The President’s subsequent admission to hospital after testing positive for Covid-19 had little effect on USD.

In terms of economic data, the US has been exhibiting surprising resilience in its comeback from the lockdown induced recession. There was a 15-point jump in consumer confidence in September – the largest jump in 17 years – taking the index above 100 for the first time in several months. The surge comes after a big drop in the number of unemployed Americans in August, and news that over three quarters of a million jobs were created by US companies in September alone – smashing expectations. New York Fed President John Williams said the economic turnaround meant the US economy was “on a pretty good trajectory”.

EURO WEAKENS AS INFLATION DIPS AND ECB COPIES FED

While the US Dollar strengthened in September, its rival, the Euro, struggled for air. At the start of the month 1 Euro bought $1.19, but by the end that figure had dropped to $1.17. Despite the Euro weakening, however, it still managed to outpace the Pound, gaining 2p.

The salient force behind the current Euro weakness is the spectre of deflation haunting the Eurozone. The recent poor run of inflation data suggests the Eurozone is having trouble breaking free from the effects of the Covid-19 lockdowns earlier this year, despite record amounts of stimulus. As new cases mount across Europe, investors are concerned that the economic impact will lead to a fresh plunge in demand. In fact, expectations are growing that the European Central Bank will be forced to enact another interest rate cut early in 2021, taking the lending rate into negative territory.

Seeming to confirm this, ECB President Christine Lagarde signalled a change to the Bank’s strategy to align it with the US Fed’s recent decision to target a higher level of inflation. While inflation remains weak at present, the move would indicate that more inflationary stimulus could be on the way.

AUSTRALIAN DOLLAR REVERSES COURSE AND TURNS BEARISH

As a risk and trade sensitive currency it’s little surprise that the Australian Dollar was buffeted over the course of September, ending the month down against the other majors. Furthermore, being at the centre of a Covid-19 outbreak that has seen draconian action taken to stop the spread in Victoria, AUD was particularly sensitive to bad news. Data-wise, private credit flatlined in September, while the number of new dwellings approved fell by 1.6 percent month-on-month.

Despite the headwinds faced by the Australian Dollar, the Pound was unable to capitalise on its weakness, hamstrung as it was by Brexit uncertainty. As a result, Sterling slipped back against the Australian Dollar, with the GBP/AUD currency pairing falling from AU$1.82 at the start of the month to AU$1.80 by the end, having tested lows of AU$1.76 mid-month.

WHAT TO LOOK OUT FOR OVER THE REST OF OCTOBER

All indications are that we can expect another month of heightened risk-off sentiment across FX markets in October. With concerns about a ‘second wave’ of Covid-19 infections centring on Europe and the US, traders are likely to continue to seek out safe haven currencies, meaning the US Dollar will benefit.

At the same time October is the final month before the US presidential election, and two more televised debates are scheduled to take place between the contenders. It is expected that no clear winner will emerge from either of these debates, which will keep markets in a state of suspense and continue to put a floor under demand for USD. The Q4 GBP/USD bank averaged forecast is $1.33, suggesting that the major banks see a Brexit breakthrough in the near future, or else expect the US Dollar to devalue for other reasons.

For Pound Sterling, October is a crunch month, with an EU summit starting on the 15th at which it is expected a post-Brexit deal will be hammered out. With officials on both sides appearing upbeat about the prospect of a deal, it remains to be seen whether Forex markets can be convinced. As a result, we can expect to see some turbulence in the value of Sterling up to and around the 15th.

The Euro will no doubt be driven by risk sentiment over the coming month, as well as by increased focus on economic data releases and ECB speculation. We will get to see the latest Eurozone inflation figures as early as 2 October, with Euro investors hoping the figure will move into positive territory again.

The Q4 GBP/EUR bank averaged forecast is €1.11.

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