Sterling worst-performing currency in the G10

GBP

Sterling was the worst-performing currency in the G10 yesterday, dropping against both the dollar and the euro. Sterling faced an almost perfect storm as rising yields in the US combined with concerns about UK energy costs and supplies. Further Brexit-related disputes also unsettled the markets. The fear in the markets is that the UK is potentially facing a period of stagflation, in other words, inflation with slow economic growth.

This morning, sterling has recovered some poise as traders start to book profits ahead of month and quarter-end. No fresh economic data is being published, but a speech from Andrew Bailey will be interesting, and all in all, a fascinating day looks in prospect.

EUR

The euro also suffered yesterday at the hands of the dollar but not nearly as badly as sterling, partly as some investors attribute safe-haven status to the single currency. Against sterling, the euro had its best day for six months gaining over one cent in the session. Christine Lagarde unsurprisingly maintained her dovish tone in dismissing the threat of a prolonged period of inflation.

With nothing on the data docket today apart from a series of economic sentiment indicators released by the European Commission, the euro will likely continue to be driven mainly by the dollar. There is another busy day for speakers from the European Central Bank, with Luis De Guindos, Phillip Lane and Christine Lagarde taking the stand.

USD

The dollar rapidly gained ground yesterday as US Treasury bond yields rose to their highest level since June, leading to a souring in risk sentiment. Federal Reserve Chairman Jerome Powell, in his testimony to Congress, gave mixed signals. He admitted that inflation was more concerning than previously thought and said there was a long way to go before maximum employment was achieved.

The market decided to pick up more on the inflationary worries, which, when added to continuing fears over China’s Evergrande group and the threat of the US Government running out of money, proved a toxic mix for stock markets. Today is a quiet day for data, with only housing reports scheduled for release. A busy afternoon is in prospect as Jerome Powell gives another speech, and any moves this causes are likely to be volatile as month-end portfolio rebalancing continues.