Sterling undermined by equity markets and fears of a no-deal – Bibby's FX update this week (7 Sep)

Mon 7 Sept 2020
Posted by: William Barns-Graham

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Last week was an eventful one for the dollar after a mass sell-off in tech sector stocks saw equity markets across the board fall in value.  

This in turn boosted the US dollar index (DXY), with the dollar rising against the pound for the first time in weeks.  

With this week’s UK-EU trade negotiations off to a rocky start, the pound comes under pressure.  

Below are the latest currency movements.  

Dollar rebounds  

The DXY rebounded from its lowest level in two years at 91.75 to a high of around 93.2 on the back of the equity market sell-offs. It begins the week at 92.8.  

The selling of tech stocks is not too surprising, given Apple was recently valued at more than the entire FTSE 100 combined.  

Despite the sell-off, US equity markets remain at all-time highs in many sectors and equities on a global level are faring much better than they were during the Covid-19 lockdowns earlier in the year.  

Tiring Sterling  

The US dollar reached its best level against the pound this year, with Sterling declining from a high of US$1.35 to US$1.32 on Thursday.  

A speech from Bank of England monetary policy committee member Michael Saunders on Thursday did little to help the pound. He gave an underwhelming forecast of the UK economy in the coming months, predicting further monetary stimulus.  

Renewed scepticism about the chances of a trade deal between the UK and EU also weighed down on the pound.  

Euro gains

Sterling opens the week valued at €1.117 euros, falling from a peak of €1.128 last week.  

Reports that the UK is looking to row back on parts of the Withdrawal Agreement – particularly in regard to subsidies and customs obligations for Northern Irish firms – also heightened speculation that the UK and EU are heading for a no-deal, which negatively impacts the value of the pound.  

ECB unhappy with strong euro

The euro has also been strengthening against the dollar in recent weeks due to the Federal Reserve’s decision to adopt Flexible Average Inflation Targeting (FAIT) – as we reported last week

The ECB’s chief economist Philip Lane spoke of the importance of monitoring the exchange rate as the euro threatened to break through what is widely regarded as psychological barrier at US$1.2.  

This has led to speculation the ECB may try to dampen any further euro appreciation, leading the currency to recede from a high of US$1.201 to $1.179, stabilising just over $1.18 at the start of this week.  

Oil falls

Oil dropped from US$43.5 per barrel early last week to as low as $38.6 over the weekend over fears Saudi Arabia is lowering its official selling price for October and data showing Chinese oil imports dropped by 7.4% month-on-month in August.  

Gold and silver also decline

Gold and silver also underperformed last week, which is surprising given the falls in equity markets. 

This may have been caused by further profit-taking after both metals reached higher-than-usual levels during the pandemic.  

Week ahead  

Sterling traders will be following the penultimate round of UK-EU talks this week with great interest.

Markets have been relatively unconcerned about the trade talks in recent weeks, viewing the comments from either side as ‘sabre rattling’ and ‘brinksmanship’ rather than a desire not to agree a deal.  

However, time is running out before the EU Leaders council meeting in October that markets have pinned as the make-or-break time for the talks, and Sterling could well come under pressure if there are no signs of compromise.  

We also have the first ECB monetary policy meeting since the FED announced its new FAIT policy. There is speculation the ECB will try to weaken the euro to support European exports.  

Economic Data  

Highlights this week include:  

Today (7 September)  

  • US Labor Day (bank holiday)  
  • German industrial production and EU Sentix Investor confidence reports  
  • UK Halifax House Price index  


  • German trade balance  
  • Eurozone Q2 GDP and Employment data  


  • EIA short-term energy outlook report  
  • US Redbook and JOLTs Job opening  
  • Canadian interest rate announcement  
  • US API weekly crude stocks  


  • ECB Monetary Policy announcement and Christine Lagarde press conference  
  • US Initial Jobless claims, PPI and Crude oil inventories  


  • UK GDP report  
  • UK Industrial and Manufacturing production and Construction output figures  
  • German and US inflation reports