What Happened

• Further economic uncertainty on multiple fronts advanced U.S. Dollar another 2.5% in September per the Bloomberg Dollar Spot Index.
• Pound Sterling dropped by as much as 8.0% to a record low for a day last month.
• Euro troubles continued with the energy crisis at the forefront as gas pipelines faced sabotage.
• Mexican Peso managed to hold its August gains with oil supplies and fuel markets in havoc.
• Promises by the Federal Reserve to hike interest rates further causing Dollar-Doom Loop.

GreenShootsFX’s View

• Volatility will remain high for GBP after the government took back criticized tax cuts.
• Economic data must demonstrate a slowdown before Fed discusses the risks of increasing interest rates too much.
• European Central Bank meeting at month’s end will test officials’ willingness to maintain an aggressive pace of tightening.
• Expect more discussion about the interest to hold a global meeting about FX values and unsurmountable greenback dominance.

In Focus

• Economic woes have finally crushed the pound’s value. Sterling fell by 17.5%, third worst major performer in 2022.
• After seeing no Gross Domestic Product for three months and a deep contraction in Retail Sales, data revealed problems for Britain.
• A troubled and eventful month that featured the Queen’s passing also introduced a new agenda from Prime Minister Liz Truss.
• Global negative consensus over planned tax cuts and debate over government revenue sank GB.
• Doubts around U.K. economic stability post-Brexit have only grown with government inefficiency and in-fighting

In Depth

Record dollar heading into blurred final quarter of the year.

Inflationary growth’s persistence has been a major driver of USD appreciation.

The Federal Reserve has made it clear that it will fight inflation regardless of how much pain is ahead for the global economy. Following the ongoing reality of rising prices for everything consumed out there, the Fed decided to increase its Federal Funds Interest Rate by another 75 basis points after the release of August Consumer Price Index data.

The result has been clear: Dollar dominance. A world without cheap rates to borrow should aid an economic downfall that is now desired by central.

A world without cheap rates to borrow should aid an economic downfall that is now desired by central bankers to bring prices swiftly down. At least in theory.

The lack of price relief to consumers, a worrisome energy crisis, and supply-chain issues worsened by the war have produced the strongest dollar we have ever seen as geographic isolation safe keeps America.

No matter how much trouble Russia is causing, the disturbances have not derailed the U.S. and its domestic goals.

One clear sector that is declining, like the Fed wants, is Housing. In August, U.S. Home Sales fell for the seventh
straight month, a sign that things are cooling down with borrowing taking a necessary hit. U.S. Mortgage Rates jumped to their highest levels since 2007, rising to 6.7% last month.

While plenty are being discouraged from entering the market, there remains a lot of concentration of home value losses in places that experienced a spike following migration and home purchases when the pandemic began in 2020. The uneven nature of regions will keep raising questions of when the Fed will need to turn around to counter the recession presently taking place and not one to arrive later.

That time does not seem like it will come very soon though, as mid-month CPI confirmed the Fed’s worst fears: prices have not subsided enough, or at all, to start foregoing further tightening of financial conditions. August CPI grew after it was expected to contract some. Meanwhile, the yearly average stands at 8.3%.

Equities markets took a beating, with recessionary fears only materializing. In the U.S., the S&P experienced multiple traumatic days, at one point falling by as much as 4.3% on the day, representing some of the worst days since June 2020. Over in Europe, the lack of answers and a determined central bank hiking rates also caused the Euro Stoxx 50 to lose over 3.4% of its total value.

Indeed, investors and traders are coping with the need to accept how the era of easy money is coming to an end. In fact, we may have also witnessed the last of the sub-zero interest-rate mode after the Swiss National Bank officially returned to positive territory on interest rates.

At their policy meeting, officials decided to do a 75-basis-points increment that brought the level up from (-0.25%) to 0.5%. After a decade-long experiment emanating from the financial crisis, Switzerland was the last negative interest-rate holdout in Europe.

The Eurozone is hoping to survive the upcoming cold months with a dwindling currency that cannot be used to do the level of business that was accustomed before the start of the Russian invasion of Ukraine. However, there have been a few shortcomings as estimates now predict that Germany will not reach 95.0% capacity when it comes to gas reserves filled for November.

After news of criminal intent sabotaging the transport of natural gas through the Nord Stream pipeline, the flows from Russia have become more limited. Meanwhile, countries are trying to do what they can to cushion industry and households from too much damage after also doling out funds for pandemic relief and stimulus.

The situation has forced the Eurozone into deep debt since the pandemic started. Recently, the International Monetary Fund recommended that authorities consider closer EU fiscal integration. They suggest the creation of an established EU fiscally united account that works through common-debt issuance to better manage downturns and continue to provide public goods.

The war has most certainly delayed economic progress in all of Europe. For example, repairs that could have been made to the Nord Stream pipeline went undone because the Canadian parts and expertise necessary could not be used under current financial sanctions.

Nevertheless, you sense that there is a determination by Europeans to counter the effects of Putin’s ambitions. In the Netherlands, Dutch ports have received new gas terminals for storage and regasification to depend less on outsourced energy.

For now, companies will also do what they can to ease the pressures of counting on fewer resources. Volkswagen has already shelved away plans to reinvent its coal-powered plants. Propane, which has escaped the price surge in other fuels, is also being replaced over natural gas by certain companies.

As we enter a crucial period, watch out for talks about FX intervention as well as an agenda for Italy.