Garton Global | Monthly Market Digest
Sterling enters September with a more mixed backdrop as resilient UK growth and improving productivity provide support, while rising inflation and a softer labour market leave the Bank of England facing a difficult policy balance. Globally, the US dollar’s August weakness has shifted the focus towards renewed Fed rate expectations, while persistent Middle East tensions and higher oil prices risk creating another inflationary shock and pushing global bond yields higher. Looking ahead, attention turns to central-bank decisions, UK fiscal credibility ahead of the October Budget and developments around the Strait of Hormuz, with each likely to shape sterling and wider FX markets through September.
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LAST MONTH: August
🇺🇸 US dollar slumped as fiscal concerns mounted
• The US dollar weakened in August as concerns over the $40tn US debt pile, rising long-term borrowing costs and persistent inflation raised questions over US fiscal credibility.
• Treasury intervention briefly pushed long-dated yields lower, but investor scepticism persisted, with the Dollar Index falling around 2.9% from late July and GBP/USD breaking above 1.36.
• The move reflected broader concerns over US policy credibility, while softer US labour and inflation data also reduced expectations for aggressive Fed tightening, adding to pressure on the dollar.
🇬🇧 UK economy held firm as inflation remained elevated
• Sterling remained supported as the UK economy grew 0.4% in Q2, with stronger-than-expected June growth and improving productivity suggesting momentum was holding up better than feared.
• However, inflation accelerated to 2.9% in July, while payrolls fell and unemployment rose to 4.9%, creating a difficult balance between persistent price pressures and a softer labour market.
• The mixed picture kept rate expectations finely balanced, but the stronger growth and productivity backdrop helped support sterling, with GBP/USD moving above 1.36 during the period.
🇮🇷 Oil surged as Hormuz disruption kept inflation risks elevated
• Oil prices remained elevated as the ongoing US-Iran conflict continued to restrict traffic through the Strait of Hormuz, a key global energy chokepoint.
• The disruption pushed Brent above $90 a barrel, while diesel prices traded at historically high premiums to crude, increasing costs for consumers, businesses and energy-intensive industries.
• Higher energy and shipping costs raised concerns that inflation could remain elevated for longer, contributing to a global bond sell-off as investors demanded higher yields to compensate for renewed price pressures
THIS MONTH: September
🇺🇸 US dollar faces renewed pressure as rate expectations shift
• The US dollar is likely to remain a key FX focus as markets reassess the Federal Reserve following a more hawkish Jackson Hole message, with expectations of a September rate rise increasing.
• The widening Fed/BoE rate differential will be crucial for GBP/USD, particularly ahead of the Bank of England’s 17 September decision, with Bank Rate currently at 3.75%.
• Sterling could therefore face greater volatility as markets weigh the prospect of higher US rates against the BoE’s response to persistent UK inflation and a softer labour market.
🇬🇧 Sterling faces scrutiny as fiscal risks come into focus
• Sterling is likely to remain sensitive in September as Parliament returns and markets focus more closely on government spending, borrowing and preparations for the October Budget.
• Gilt yields are already elevated, with concerns over looser fiscal policy potentially pushing borrowing costs higher and weighing on investor confidence.
• Any signs that the Burnham government may increase borrowing or raise spending could therefore put renewed pressure on sterling, particularly against the euro, where major banks already see scope for a correction
🛢️ Oil rises as renewed Middle East tensions revive inflation risks
• Oil prices are likely to remain a key market risk in September as renewed US-Iran fighting pushes Brent towards $95 a barrel, keeping pressure on energy costs and global inflation.
• A sustained oil shock could drive bond yields higher as investors price a greater risk of inflation remaining elevated for longer, reversing some of the summer’s calmer market conditions.
• This would complicate the policy outlook for both the Federal Reserve and Bank of England, forcing policymakers to balance persistent inflation against weaker economic and labour-market conditions.
Have a great month,
The Garton Team.