The pound has weakened and lost previous gains as the US dollar strengthened. Investors remain cautious following recession and Brexit concerns. Fed Chairman Jerome Powell and Governor of the Bank of England Andrew Bailey are expected to speak at the Policy Panel at the ECB Forum on Wednesday. With inflation persisting and remaining high, Governor Bailey would possibly avoid pushing back too much against tightening expectations.

Sterling has not been affected by news of another potential Scottish referendum (19 October 2023), as the possibility of Westminster allowing it is unlikely, but remains to be seen over the coming months.  

Fed and BoE commentary

Markets have high expectations of Federal Reserve chair Jerome Powell delivering a hawkish commentary on interest rates in his speech on Wednesday.

The speech from Bank of England Governor Andrew Bailey will also be in focus. Bailey may discuss how to create price stability in the UK economy. Markets expect a hawkish commentary.

In other news, the Financial Times (FT) reported on Tuesday that the UK is ready to cut off gas supplies to mainland Europe in case its economy faces shortages under an emergency plan. This may create lower oil stockpiles in the Eurozone and could have a negative effect on Brexit.

Recession worries weigh on markets

Recession worries are weighing on markets today, after inflation hit consumer confidence in America. Wall Street fell yesterday, while the S&P 500 lost 2%, and Nasdaq 3%.

The current business conditions are deteriorating each month, while consumers are expecting things to get worse. This pessimistic view highlights the damage that has been done by inflation.

European markets were also lower on Wednesday, with the FTSE 100 down around 55 points, while Germany’s DAX was down 1.1%. Investors are unable to avoid feeling worried about a global slowdown. As Richard Hunter, head of markets at interactive investor said, “With the consumer being central to US economic growth, the recent raft of pessimistic readings has led to some concerns that sentiment could become self-fulfilling as consumers hunker down in the face of higher prices, especially fuel and food. The Federal Reserve will of course be aware of the deteriorating sentiment, but for the moment is showing no signs of abandoning its primary objective of battling inflation head-on.”

Pound concerns

The market sentiment remains weak as there are fears that central banks’ more aggressive attitude to raise interest rates sharply to control inflation would hurt global economic growth. This belief has helped to strengthen the US dollar and pushed the pound lower. The pound was further weighed down by Brexit concerns and expectations that the Bank of England would follow a more gradual approach towards raising interest rates.

On Monday, the UK House of Commons voted in favour of a divisive bill that would unilaterally change part of Britain's Brexit deal agreed in 2020. The move raises the risk of new tensions with the EU as the cost-of-living crisis in the UK and recession fears grow. This will continue to undermine Sterling.

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