ACM Update 07-10-24
Recent market movements have shown how quickly things can change. GBP-USD came back down by roughly 2.5% last week, as various unexpected factors drove the pair. All this came ahead of the latest US jobs figures which arrived in buoyant fashion on Friday lunchtime.
The coming week is filled with US data, with Federal Reserve meeting minutes and inflation figures of most significance. In Europe the ECB release their own meeting minutes, whilst the GDP figures arrive for August in the UK. Will these mark a hat-trick of months with 0% economic growth?
Markets have continued to fluctuate of late and at the moment there are (broadly) three major influences on foreign exchange prices. What will happen to UK interest rates? What will happen to US interest rates? What will happen to the geopolitical situation in the Middle East? All three were in focus last week, causing volatility.
On UK soil, the future path of UK interest rates has been supporting the pound heavily in 2024. This has (had) seen sterling as the best performing major currency this year, with expectations for UK interest rates to remain at their current high levels for some time. Comments from the Bank of England’s committee members of late have continued to back this. That was, until last week.
A Guardian newspaper article published in the UK on Thursday morning, saw Governor Andrew Bailey offering his latest thoughts on UK monetary policy. Despite an interview that could easily be described as balanced, Bailey did open the door to the possibility of larger rate cuts to come, which was what financial markets paid attention to.
The main market-moving comment was the possibility of the bank becoming “a bit more aggressive” in reducing interest rates, as long as inflation figures remain on the right track. Such a hint hadn’t been seen previously from the Bank’s Governor, but as always he is just one vote of the nine to be cast at each meeting. Overall, the Pound lost over 1% against the Dollar during Thursday morning.
Bailey also spoke about the “very serious” situation in the Middle East, whilst also hitting back at comments from short-lived former PM Liz Truss.
In separate speeches, fellow MPC members Megan Greene & Huw Pill gave their own views on upcoming monetary policy. Greene was similar to Bailey and suggested that more interest rate cuts are likely, with prices (inflation) “moving in the right direction”. Pill however urged caution and believes the committee should be moving “gradually” on any rate reductions.
Despite a good start to the year for the Pound, UK data continues to struggle. UK growth figures for Q2 were confirmed as 0.5%, short of the 0.6% expected. Services PMI figures for September were below forecast too, with the only optimism in Construction sector data, likely buoyed by the August interest rate cut helping the industry.
Meanwhile a nationwide survey of business heads revealed they are in their most pessimistic position since just after the aforementioned Liz Truss’ spell as PM, in late 2022. Looming tax hikes and potential threats around the upcoming budget were offered as the main concerns. Meanwhile, new PM Sir Keir Starmer was in Brussels trying to build bridges with Europe, post Brexit.
The volatile GBP-USD chart from last week can be seen below:
Given the US-focused data to be released last week, these would have been expected to have been the main Dollar drivers. However, naturally the geopolitical situation in the Middle East took headlines. In times of uncertainty, safe haven currencies such as the USD usually gain strength and this indeed proved to be the case. The Dollar gained 1.5% across the board in the first half of the week, even before the jobs-related releases arrived.
Another factor in the USD strength last week was a speech from Jerome Powell. The Federal Reserve Chairman outlined his thoughts on the path of US interest rates going forwards, by insisting the committee don’t have a pre-set course. He was happy with the current economic strength and sees inflation continuing to cool going forwards.
Perhaps the biggest takeaway was his clarification that the recent 0.50% rate cut shouldn’t be interpreted as a sign of future moves being as aggressive. Markets took this as confidence that perhaps the dot plot (the expected path for US interest rates), wouldn’t be quite as sharply downwards as previously thought. The Dollar gained strength accordingly.
Aside from that, the US jobs news painted a better picture for the sector. The number of job vacancies listed in the JOLTS figures was well up on the forecast, and indeed the previous month, at just over eight million. The Friday Non-Farm Payrolls data for September also produced a reading well above expectation, hitting the best since May’s numbers at 254,000 (147,000 jobs added was the forecast).
Considering a slowdown in the US jobs market prompted the 0.50% cut in interest rates a few weeks ago, one could argue that these figures prove the employment sector is on a more stable footing. This too added to the USD strength, as well as the fact that the overall unemployment rate dropped down to 4.1%. Services PMI figures released also proved buoyant in September.
On the other side of the interest rate coin though was Fed policymaker Austan Goolsbee. His (admittedly slightly vague) suggestion remains that US interest rates still need to come down by “a lot” over the next 12 months. Read into that what you will!
In the Eurozone, ECB President Christine Lagarde spoke on Monday at the EU Parliament’s Committee on Economic and Monetary Affairs. She maintained the recent narrative on policy needing to remain “sufficiently restrictive for as long as necessary”, suggesting rates would come back down “over time”. She noted the labour market in the bloc remains resilient, but the economic recovery is still facing headwinds.
Lagarde and colleagues have for some time suggested that inflation would dip before edging back up in the fourth quarter, and they seem to have the first part of that correct. The initial Flash Estimate for CPI inflation in the bloc for September was released as 1.8% at the start of last week. This would be the first time under the Bank’s 2% target since June 2021.
Over the weekend, ECB committee member Francois Villeroy de Galhau remarked that the bank would “quite probably” cut rates at the next meeting on 17th October. He referenced the fact that their goal for the last two years was not to overshoot their 2% mandate, but now they must focus on not undershooting that figure and instead address weak growth.
Manufacturing and Services PMI figures were also released for the bloc. The former produced another disappointing range of releases, with only the Spanish figure in expansionary territory at 53. The Services sector results were better, again with Spanish figures leading the way. The Eurozone figure as a whole was in expansion but down on recent months.
Broadly, movements for the Euro were largely driven by events elsewhere. The single currency gained against GBP after the Bailey comments, but lost ground to the US Dollar amidst geopolitical events and the jobs data. Recent moves on Sterling-Euro can be seen in the chart below:
The week ahead:
Monday – Australian Bank Holiday, Eurozone Retail Sales (10:00 UK time), Fed Bowman (18:00) Fed Kashkari (18:30) & Fed Musalem (23:30) speeches
Tuesday – BRC Retail Sales Monitor (00:01), RBA meeting minutes (01:30), Fed Bostic speech (17:45)
Wednesday – RBNZ rate meeting (02:00), Federal Reserve meeting minutes (19:00)
Thursday – ECB meeting minutes (12:30), US CPI inflation & Unemployment Claims (13:30)
Friday – UK GDP (07:00), US PPI inflation (13:30), University of Michigan Consumer Sentiment (15:00)
After a busy few days just gone, market releases this week are somewhat lighter. That said though, any clues from the respective minutes from the recent Federal Reserve and European Central Bank meetings, will drive those two currencies.
As we saw last week, unexpected narrative on monetary policy such as that from Andrew Bailey, can cause considerable movements. This is why it is vital that your points of contact on the Aston team are aware of any upcoming requirements.
For GBP-USD, we can expect the pair to remain driven by the three factors I mentioned earlier. These are geopolitical events in the Middle East, narrative on future UK monetary policy and narrative on future US monetary policy. The former of these remains the most uncertain at present. On the topic of US interest rates, we may get more clues on Wednesday evening when the recent meeting minutes are released. Thursday’s inflation numbers will also be linked to this.
For the Pound, the UK GDP release on Friday morning is forecast to show 0.2% month-on-month economic growth in August. This would mark the first month in three with any growth at all if correct, after the economy flatlined in June and July. New PM Starmer will be one of many hoping for at least a positive metric, but the Bank of England will be watching closely too.
As always, reach out to the team with any pending needs.
Have a great week.
