ACM Update 23-06-25
Amidst a backdrop of geopolitical uncertainty, currency markets remained volatile last week with the Dollar regaining some ground. Interest rates being held in the UK & US demonstrated a level of uncertainty from the Federal Reserve and Bank of England, whilst economic data in both countries disappointed.
This week sees a range of appearances from Andrew Bailey and Jerome Powell, as well as the Federal Reserve’s favourite inflation measuring metric of Core PCE on Friday afternoon.
The escalating conflict in the Middle East continued to be a factor in currency markets last week, even in advance of US action over the weekend. Oil prices soared, whilst the overall uncertainty inevitably favoured the safe haven of the US Dollar.
Outside of the geopolitical factors though, the US Dollar was gaining for other reasons. As widely expected, the Federal Reserve opted to leave interest rates on hold again at their fourth meeting of the year. Amidst a lack of clarity on growth, inflation and employment, the committee opted for their 2025 wait and see approach to continue for now.
The Fed narrative also maintained expectations for two rate cuts for this year, however they do see higher inflation likely over the coming months. Despite being called “stupid” and a “real dummy” by Donald Trump, Jerome Powell seems confident that the US economy remains in a good place for now, amidst all the tariff-related headwinds.
The further we move into the year though, the less likely the current expectation of two interest rate cuts this year is to materialise. With tariffs, increases in oil prices and a general consensus that inflation will rise throughout the summer, markets are more leaning towards just one cut. In fact, the number of members on the Fed panel calling for no rate cuts this year, moved from four to seven in this meeting.
The shift in rate cut expectations was a major factor in a strengthening Dollar last week, as well as the geopolitical uncertainty. Less rate cuts would mean a more favourable Dollar, at least for a while.
Slowdowns are starting to appear in US markets though, highlighted in May’s retail sales data. This showed a -0.9% drop when compared to April, which itself was a fraction down on the month before. Any sustained pattern of consumers holding off on spending will be bad news for growth and also the employment market.
Due to the assortment of above factors, Dollar movement remains difficult to predict at present. Prices remain little over a per cent shy of three and a half year high though, so we are in a good position as things stand for any Dollar buyers.
Below is the GBP-USD chart for last week and this morning:
The UK had plenty of data releases to talk about last week too, including an interest rate hold. The Monetary Policy Committee of the Bank of England opted to keep interest rates at their current 4.25%, however the split of votes differed slightly from what was expected.
Six members wanted rates to be held, whilst three members (Swati Dhingra, Dave Ramsden & Alan Taylor) decided a cut was their preferred move. Concerns were raised about the situation in the Middle East, as well as the economic impact of events there. Oil prices are up by over 25% since the Bank’s last policy meeting six weeks ago, which will inevitably have an impact on inflation in the medium term.
Andrew Bailey also noted the “softening labour market” in the UK, impacted by changes to employer national insurance contributions in April. He again voiced concerns about these changes and how economic growth has fallen after a favourable Q1, since the new tax measures came into effect.
The latest UK inflation data was also published last week, showing a constant 3.4% for the metric. This followed last month’s number being revised down from 3.5% to 3.4% after errors with tax data, according to publisher the Office for National Statistics.
The ONS figures did show quite a concerning jump in food inflation though, itself up by 4.4%. The price of chocolate meanwhile was up by a record amount of over 17%! Stubborn inflation, with expectations of incoming fuel price hikes as a result of the Middle Eastern conflicts, means we are unlikely to see the UK cost of living cooling any time soon. Thus UK interest rates could well stay put for now, despite a stagnating economy.
High street spending is also gloomy after UK retail sales dropped by -2.7% in May compared to April, their biggest fall since December 2023. Supermarkets and food retailers took the brunt of the drop, alongside cigarettes and alcohol sales, as consumers begin to cut back after recent tax changes.
In the same release, Government borrowing was £17.7bn in May, itself a jump of £0.7bn since the same month last year. In positive governmental news though, Starmer & Trump signed a trade agreement at the G7 summit, even if the paperwork was dropped on the floor during the press ceremony. Ominous?
On the subject of the G7 summit, a number of Eurozone heads were in attendance in Canada last week for the event. Whilst the Israel-Iran conflict was naturally the major talking point, EU chief Ursula von der Leyen again warned Donald Trump against a trade war between Europe and the US.
On the data side, Eurozone CPI was recorded as 1.9% in May, now just under the European Central Bank’s 2% target. In their last meeting minutes, the panel did suggest the likelihood of a rise in this metric though over the summer. However, that could indeed head up further as a result of recent events, in a similar pattern to what we saw late last year.
On their own policy front, German ECB policymaker Joachim Nagel spoke on Thursday confirming he thinks the bank are “on the right track” when it comes to monetary policy. He already thinks European interest rates are in “neutral territory” suggesting that we may well see a sustained pause in ECB rates at their current level. This offered some support to the Euro.
Economic confidence figures marked their best in three months for both Germany and the EU as a whole. This marks a turnaround from recent tariff woes. The aforementioned Nagel also stated that if Washington doesn’t back down, it would in fact be Americans paying more for European goods, not the other way round. Watch this space.
The GBP-EUR chart last week, showing a strong week for the Euro, can be seen below:
The week ahead:
Monday – EU/UK/US Manufacturing & Services PMIs (08:15-14:45 UK time), ECB Nagel speech (16:00)
Tuesday – BoE Greene speech (10:30), BoE Ramsden speech (14:35), BoE Bailey speech (15:00), Fed Powell testimony (15:00), US Consumer Confidence (15:00), BoE Breeden speech (16:50)
Wednesday – BoE Lombardelli speech (09:45), Fed Powell testimony (15:00)
Thursday – BoE Bailey speech (12:00), US Final GDP & Unemployment (13:30)
Friday – Core PCE Price Index (13:30)
Based on commentary last week from the Federal Reserve, Bank of England and the European Central Bank, it looks likely the big three are all now in a wait and see, holding pattern on policy. There is simply too much uncertainty at the moment in terms of geopolitics, international trade and inflation, to be confident in any major policy adjustments. The big three banks therefore seem to keep their headline rates where they are for now, awaiting further clarity.
The ECB seem to be done with their interest rate cuts, whilst the Federal Reserve and Bank of England still have interest rates at a higher level than pre-pandemic. If inflation bounces back up as a result of oil price shocks and international trade concerns, then this could well be beneficial to them. We wait and see.
US data remains mixed at best, despite confidence from the Fed Chairman Powell. He testifies this week in front of the House and Senate, both of whom are likely to press him on policy plans. His UK counterpart Andrew Bailey also faces parliamentary questions.
Above all, geopolitics will inevitably heavily impact foreign exchange markets as the conflicts in the Middle East continue. Both in the short term with a potential flight to safety in the US Dollar, followed by the potential longer-term impacts on inflation. This added uncertainty makes predicting future moves virtually impossible, with protecting any outstanding currency conversions, likely the better option.
To give security on your payments, reach out to the Aston team and we can help you protect your budgeted costs.
Have a great week.
