Why sterling could face a difficult autumn

Sterling has spent much of August steady against the euro, but autumn could be considerably livelier. The UK economy grew by a healthy 0.4% in the second quarter and consumer confidence has improved, offering some support to the pound. Against that, inflation rose to 2.9% in July and the government unexpectedly borrowed money during a month when the Treasury would normally record a surplus. With the Budget looming and markets already questioning how much freedom the government has to spend, fiscal policy could increasingly become a driver for sterling. The big risk for clients is assuming today's relative calm will last.

The euro has been difficult for sterling to shift this month. The European Central Bank held interest rates unchanged in July as policymakers assessed the inflationary consequences of higher energy prices following the Middle East conflict. That leaves the euro in an interesting position. Several major banks expect sterling to weaken against it towards the end of the year, although forecasts are certainly not guarantees. For clients buying in the eurozone this autumn, the important point is that GBP/EUR has already retreated from the highs reached in July. Waiting for those levels to return is a market bet, not a financial plan.

The dollar has weakened dramatically against sterling during August, but Friday could change the mood. New Federal Reserve chair Kevin Warsh delivers his keynote speech at the Jackson Hole economic symposium, one of the most closely watched central-banking events of the year. Markets will be listening for clues about where US interest rates go next. A more hawkish message could support the dollar; stronger hints of future rate cuts could work the other way. For anyone with a dollar requirement, it is another reminder that a relatively uneventful summer market can change remarkably quickly.