GBP Plummets to Record Lows against the US Dollar

Okay, good morning, good morning from the Amplify HQ here in London. Just a quick look at the week ahead, and actually, really, has the main event already happened? I mean, it's only Monday morning here, here in Europe, but I'm showing you the chart of the pound versus the dollar, and what happened last night was something quite extraordinary. So around about 1:40 AM, so bang in the kind of middle of that Asian session last night, you saw this big monster move to the downside. So we saw cable trading from 1.08 all the way down to almost testing that 1.03 handle, a 500-pip— wow, collapse is perhaps the only way to describe this. So what's going on here? And obviously, you know, what we've seen over the course of— well, if I zoom back, I mean, this is just looking over the last sort of We'll come back to this timeframe because I want to talk about why it's retraced the whole move in a second. But look, this is a story that's been playing out all year. This is a look at 2022. And as you can see, sterling has been devaluing against the dollar consistently. And in fact, when you look at the kind of low point we had last night, it's about a 25% devaluation. Now, that's the pound devaluing against the dollar. There's a few different elements to this story. I mean, more broadly, what's been going on this year has been not only is this the pound, obviously the US dollar is in this currency pair and in this exchange rate, and the dollar has been rampant all year against all currencies. And that's just simply because of the fact that the Federal Reserve is being more hawkish than other central banks. The US economy, you could say, is a little bit more sheltered against the energy price crisis that we're suffering here in Europe. However, you know, the US does have a kind of very extreme inflation crisis of its own. And so the central bank is really stepping out and aggressively hiking rates at the pace of 75 basis points every 6 weeks, right? Every 6 weeks when they have their meeting. And the Fed last week had a super hawkish meeting where yet again, they're telling us they're going to have to raise rates faster for longer. The peak in this interest rate hiking cycle is going to be higher. So all this is feeding through to dollar strength. Now, in the meantime, of course, you've got sterling weakness. And that was really kind of exacerbated when the new UK government rolled out their aggressive budget on Friday last week. And this is where they've decided to go big— I mean, to go very risky. They've decided a big change is required, and they've really done a complete U-turn on the Conservative Party sort of fiscal policy that we've been used to for the last decade. And the U-turn is, let's cut tax and let's fund that through more borrowing. Their idea is by cutting tax, they can drive an increase in economic growth, and that economic growth and that kind of economic outperformance itself will lead to higher tax revenues, even though the tax rates are lower, and it'll all be fine, and productivity will improve, and really just trying to kickstart this economy that's really led there on the, on the kind of, on the deathbed in hospital. Now, the issue is, of course, that is it going to work? And you could argue there's a few risks here, because is it going to create more inflation? So the idea of cutting tax means people get more money, of disposable income, that is, and will that lead to more demand, which leads to more inflation? So are the Bank of England, for example, going to have to raise rates more? And there's talk in the press this morning, and I have to say it's sensationalist, but there's talk the Central Bank of England here may well have to call an emergency meeting maybe this week. I would seriously doubt that's going to happen, but you never know, I guess. The reason why they might be forced into that is if the currency's value continues to plummet. Now, if that does happen— and look, it hasn't hit parity yet, but it might do. And if I go back to the short-term chart, it has rebounded now. But something that might force the Bank of England's hand is if this currency pair continues to the downside at a pace. And if it hits parity and goes below parity, well, fine. The central bank may have to step in and intervene. They might hike interest rates. Who knows? They might even do a Japanese-style intervene directly in the market, which would be entirely unprecedented for the UK. But look, you've got the sensationalist press talking about maybe the Bank of England will have to hike rates because this move by the government's reckless and it's inflationary. The other issue is with sterling dropping like this, that's really a reflection of traders' concerns about the economic health, the fiscal kind of sustainability of this country. Because the issue is with borrowing a lot more money to fund these tax cuts, well, borrowing costs have just gone up sharply. And actually, borrowing costs as a result of the government's new tactic have gone up sharply. So this borrowing is going to be more expensive. And this is leading to concern, right? And the currency is devaluing. The knock-on effect of that is, well, that's inflationary from an import price perspective. And especially when we have an energy price crisis where most of the inflation we're seeing anyway is because of natural gas prices spiking because of the geopolitical situation over in the Ukraine. Well, we've got to buy this natural gas in dollars, and dollars just got a whole load more expensive. So as sterling weakens, it's actually exacerbating even further the energy price crisis that we have. So this is all kind of wrapped up into this big move last night. If we drill into this very quickly, I mean, the big move, I mean, it was huge, 500 basis points, right? Sorry. Yeah, well, 500 pips. Now, one of the kind of factors around this is the timing. This is bang in the middle of the night if you're in Europe. Everyone's asleep. US traders certainly aren't at their desks. And this is always the lowest volume moment of the trading day. That just means there's less orders on the order book. And we describe that as meaning there's less liquidity. Now the thing is, if you get a large order when the order book is thin, this creates a very large exaggerated move. And often that exaggerated move can move the price so far it actually starts triggering stop losses. And then these stop losses, of course, that's more volume on the sell side. And often this can very quickly and rapidly lead to a massive but often short-term temporary move. And I think that's what happened last night. Here we are trading almost all the way back to the 108 handle, which is kind of just more evidence that this big move last night, in the very short term at least, was just an exacerbated move due to poor liquidity conditions and perhaps one big trade coming in, triggering some stops. So look, we're back at 1.08. You can just calm down a little bit and breathe. But this doesn't mean we're out of the woods. This currency pair is trending to the downside. And if we continue to get dollar strength, if we get negative UK data and more panic about the government's U-turn on strategy, then for sure this currency pair could continue to trend down towards parity. And then it's going to be interesting to see what the Bank of England might have to do about that as a result. So that's what's going on this morning. That's what's grabbing all the headlines. Those of you looking at your kind of FTs this morning, then certainly the sterling's move overnight is the story of choice. If I go and have a look at that, you know, traders bet on emergency interest rate rise from the— after the pound hits record lows. As I said, I think that's quite sensationalist. And sterling bouncing back to the 1.08 handle will make those fears just go away a little bit. What else is happening? Well, big news out of Italy over the weekend where we've had the election result. And Giorgia Meloni officially becomes the first female prime minister in Italy's history. Excellent. She is the kind of head of the Brothers of Italy. And together with her kind of coalition partners, and that's Matteo Salvini from the Nationalist League, and then good old stalwart Silvio Berlusconi and his Forza Italia party. Berlusconi's 86 now, by the way. Anyway, together they've won a 43% sort of majority in Parliament, which gives them a certain amount of power. Platform and a certain mandate. These guys come out of the very far right, or certainly Meloni's Brothers of Italy party come out of the far right kind of neo-fascist sort of stance. So there is concern globally what this might mean politically for Italy. What does this mean with regards to their position in the, in the EU? What does it mean with regards to their position in the eurozone? What does it mean for their debt? And here's a look at the Italian 10-year yield, because Italy have got 150% of debt-to-GDP ratio, which is very, very high. And you've seen over the last few weeks that as we've been approaching the election, yields are on the climb. I would say if Italian 10-year yields break the 5% level in the coming days as a result of this risk, then we need to start to stand up and really monitor this. This could well become the big issue amongst lots of big issues out there at the moment. But we'll have to monitor this and we'll see. I mean, there is a thought that this is the same old Italian political change-up. The number of prime ministers they've had is, I mean, I think they've had 69 prime ministers in the last 72 years. And what tends to happen is the new prime minister comes to the table with all this enthusiasm and what they think is momentum, but they just hit the brick wall of what is the parliament in Italy that really prevents anyone from doing anything. So there is an argument to say, "Yeah, sure, this is a right-wing party coming to power." And look, in 2018, Meloni's party just won 4% of the vote. Now they won 25%. So this is obviously a monster swing and a story we need to be monitoring. But the big measure as to whether it's going to be a flashpoint and become the big macro force on global markets, that'll be if these yields climb north of 5% fast. So keep your eye on this as we go through the week. Other stuff on the agenda this week. Well, really, it's mainly, I would say, obviously, the continued fallout from last week's Fed hawkishness, the continued dollar strength. The continued downside that we've seen in stock markets into the end of last week. And I'd say the big data points, unfortunately, they don't really come until Friday. But the big data points on Friday to look out for will be eurozone CPI. That's the flash estimate for the month of September. We'll get a fresh update on this energy price crisis in Europe and how it's having an impact on, on inflation. Conditions. We'll also get the US PCE data, and that's the Fed's preferred inflation reading. That is August news. But look, we want to see it, see if that backs up the US CPI report we had a couple of weeks ago that showed core inflation climbing, which led the Fed to then be hawkish. So we'll see if this core PCE data on Friday afternoon out of the US kind of reconfirms that. And we also have then some Chinese PMI numbers on Friday. So from an economic data point, it's definitely Friday's the big day this week. But in the meantime, let's see how things play out. Keep your eye on the pound. Keep your eye on Italian 10 years. And keep your eye on these stocks for any sign of a kind of respite in what has been an incredibly negative couple of weeks. OK, that's your week ahead, guys. Thanks very much.