Global Tensions, UK Tax Plans and Energy Prices: Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

Trump and Xi meeting leaves markets in limbo as Greenland agrees security deal with US

US President Donald Trump and Chinese Premier Xi Jinping are set to meet in Washington this week, with efforts to de-escalate the ongoing tariff dispute high on the agenda. Trump has also threatened additional sanctions on countries benefiting from Iranian oil exports or assisting its war effort, a move directed at China among others.

The two leaders are also expected to discuss AI safety measures, although much of the groundwork has already been covered during preparatory ministerial talks held in New York.

Meanwhile, Greenland, alongside Denmark, is prepared to accept enhanced permanent US military and security powers, but only after the US dropped its demands to purchase or annex Greenland.

This week’s US data calendar is relatively light, with PMI, current account and University of Michigan consumer sentiment figures due. Federal Reserve speakers, including Goolsbee, Williams, Barkin and Hammack, may also provide greater clarity on future monetary policy moves, potentially offering the US dollar some additional support.

With USDCAD above a key psychological level and the dollar index above 100, downside risks for the dollar have eased for now.

UK mansion tax could put further pressure on an already struggling housing market

The UK government has spent the weekend considering proposals aimed at raising additional revenue, with reports suggesting that the threshold for the planned mansion tax could be lowered to £1.5 million from £2 million.

While this may appear to offer an easy way to raise funds, it could face legal challenges and generate significantly less revenue than anticipated, much like other flagship tax measures that now appear likely to deliver less than originally projected.

Rightmove’s latest house price data recorded a sharp decline in house prices. Coupled with recent falls in mortgage approvals, there are signs of further weakening in housing demand. Meanwhile, government targets to build 1.5 million new homes during this parliament have recently been described by Housing Minister Angela Rayner as a “stretch target”.

While stamp duty revenues are running at an all-time high, this appears largely to reflect the expiry of temporary relief measures that previously weighed on receipts while supporting demand. Homebuyer activity remains subdued compared with last year, with higher borrowing costs and a weaker labour market among the factors acting as a drag.

The UK economy continues to struggle despite several factors providing temporary support to activity. The government is currently attempting to identify additional revenue streams to meet rising spending demands, but has yet to outline plans to reduce spending, despite expenditure tracking above expectations during the first five months of the fiscal year. According to Moneycorp, this could represent a significant threat to sterling, similar to the market reaction to the Liz Truss Budget in 2022.

Eurozone PMIs and German IFO figures in focus as political uncertainty weighs on the euro

This week brings a relatively light calendar of economic releases across the Euro Area, although the September PMI and German IFO surveys will attract attention. Both should provide an early indication of whether activity and confidence improved following the summer months.

From a political perspective, the German government continues to face difficulties. Regional elections held over the weekend saw the CDU, the largest coalition partner, fall to less than 5% of the vote in Mecklenburg-Western Pomerania. In Berlin, Die Linke finished ahead of the CDU for the first time in a state election.

The coalition’s weak performance, including the SPD’s fifth-place finish, its worst result on record, could alter the German political landscape. Questions are increasingly being raised about the leadership of Chancellor Friedrich Merz.

Political challenges are also evident in France, where National Rally maintains a lead in presidential polling, while similar trends are becoming visible in Italy and parts of Northern Europe. According to Moneycorp, this adds political uncertainty to the existing economic and fiscal challenges facing the euro.

Speeches from ECB officials including Christine Lagarde, Philip Lane, Joachim Nagel and Isabel Schnabel will also be closely watched this week.

Middle East conflict continues to put pressure on military resources and energy prices

US Secretary of War Pete Hegseth stated over the weekend that Europe is more reliant on Middle Eastern oil and gas supplies and that developments involving Iran and the Strait of Hormuz are therefore more of a concern for Europe than the United States.

Moneycorp notes that the conflict continues to place upward pressure on energy prices. Without meaningful progress towards renewed negotiations, prices could become even more elevated as winter approaches. The conflict also presents risks to global economic activity, with the outlook remaining skewed to the downside while the situation persists.

From an energy perspective, oil and gas prices are likely to remain elevated unless supplies return to something approaching normal levels. With European gas storage levels well below historical norms, those pressures remain present.

US-Canada trade tensions continue as Mexican interest rates remain in focus

Trade talks between the US and Canada still appear unlikely to resume in the near term, with mixed messaging from the US administration contributing to a sharp decline in container traffic across the Great Lakes and to ports in the United States.

The US President has suggested that a trade deal could be reached soon, but has also indicated that additional sanctions may follow if Canada and the European Union pursue closer economic ties.

USDCAD has moved back above key levels, making Canadian goods relatively inexpensive compared with their US counterparts. Beyond the release of August retail sales data, the Canadian economic calendar is relatively quiet, and Moneycorp expects that figure alone to be insufficient to provide the Canadian dollar with a significant boost.

In Mexico, attention will centre on this week’s Banco de México interest rate decision. A hold decision is widely expected, particularly following the Federal Reserve’s decision to raise interest rates.

If Banxico were to signal the possibility of further cuts, given the trajectory of the Mexican economy and the performance of exports to the United States, that could place additional pressure on the Mexican peso. However, Moneycorp notes that this remains the broader risk given the ongoing trade difficulties affecting Mexico’s largest trading relationship.

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