In Liz, we trust? The new PM is here, but can she spare the Pound from parity with the Dollar or, worse, the Euro? The BOE and ECB have their work cut out if they want to compete with the Dollar. The BOE has been consistent in its approach, but even with six consecutive rate hikes, the Pounds have lost 15% against the Dollar. It is widely anticipated that the ECB will go full-on hawkish this week with a 0.75% rate hike and GBP lost 1.5% last week in anticipation. It’s a difficult time for the UK, and all eyes are on the new PM to steer the ship away from the oncoming recession iceberg and winter of discontent.
Europe is in a desperate spot itself, with Gazprom announcing that the Nord Stream pipeline will remain shut after a “technical issue”. The technical was more political than mechanical, with the G7 agreeing to impose a price cap on Russian oil. Whilst the battle is still being fought on the ground in Ukraine, President Putin is waging an energy war against Europe. If the pipes remain closed for the long term, we can expect a further Euro sell-off even with a 0.75% rate hike in play. Russia didn’t mince its words either when it stated that any country that supports the oil embargo would not be supplied with oil and oil products.
In independent and energy-efficient America, things are looking peachy. Employment data showed that the US economy is still growing, adding another 315k jobs in August. The DXY also hits its highest level since 2002, topping off at 110.5 and remaining there. Fed Chair Powell will give another speech on Thursday after the ECB rate decision. If he remains as hawkish in tone as he did at Jackson Hole, we could likely see a stronger dollar decimating GBP and EUR.
However, it’s not all as peachy as it would appear with Saudi Arabi, OPEC and BRICs joining in cutting oil production, which will inevitably increase inflation for everyone. The move could be seen as an attempt to de-throne the pertodollar and replace it with a commodity-based currency.
This week we focus on Thursday’s ECB rate decision and Fed Chair Jerome Powell’s speech. An energy crisis plan from Liz Truss may give some hope for sterling if revealed this week.