ACM Update 25-11-24
Geopolitical events saw a strong week for the US Dollar, moving GBP-USD to its lowest level in over six months. The pair has now fallen by some seven per cent in the last eight weeks, and four per cent since the US election. Euro-Dollar meanwhile hit a two-year low.
The highlight of the coming days will be the minutes from the latest Federal Reserve meeting, which arrive on Wednesday night. This precedes the Thanksgiving bank holiday in the US on Thursday, followed by the spending bonanza that is Black Friday.
Politics and geopolitics were the main headliners of the last seven days. Escalations in the Russia-Ukraine war, as well as in the Middle East, saw the US Dollar gain ground. A flight to safe-haven assets such as the US Dollar is common in times of geopolitical uncertainty, which is exactly what we saw. Elsewhere G20 meetings and the COP26 summit also took place.
UK inflation figures were back in the spotlight last week. Having dropped in September to 1.7%, their lowest in three and a bit years, the metric rebounded in October. The change wiped out the inflation-battling progress of the last six months, heading back to 2.3%.
But despite this being bad news, the change was only a fraction more than market estimates of 2.2%, with the main contributory factor being a rise in energy bills in October. However, there are concerns that the UK cost of living could increase further as a result of the recent budget. Many large firms have warned that some of Chancellor Reeves’ tax changes could well be passed on in the form of price rises to end consumers. Such a move would not be what the Government had envisioned in their election pledge to make working people better off.
Inflation bouncing back up also means that UK interest rates are likely to stay put in December’s Bank of England meeting. Some members have already expressed concerns that the battle against inflation is not over yet, one of whom is policymaker Catherine Mann. In a speech last week she reaffirmed that the committee should be keeping rates on hold given global risks. In her view, these were not only geopolitical events, but also the knock-on effects of Donald Trump’s proposed tariff hikes.
We also heard from other UK policymakers last week. Deputy Governor Dave Ramsden spoke on a different topic, about how interest rates may need to be cut more rapidly if inflation falls “materially” below 2%. His comments came shortly after the inflation news, thus may not be applicable for the foreseeable.
His colleague Megan Greene seems to be siding more with the Catherine Mann approach though. She also spoke last week on how caution is required on rate cuts. The American believes that services sector and wage growth inflation remains too high for now, suggesting a pause in rates is likely for her in a few weeks.
UK Retail Sales were also impacted by the Budget. October’s figures saw a monthly fall of -0.7% as consumers were more cautious in their spending patterns in the lead-up. Warmer weather in the month was also attributed to a fall in clothing sales. The housing market took a nervy drop, down by -1.4% in the month according to Rightmove, whilst Services and Manufacturing PMI figures too were well below expectations.
Sterling saw sizeable falls against the Dollar last week due to the aforementioned geopolitical events. The pair even sat under 1.25 for a while on Friday. Movements during the week can be seen in the chart below:
Economically, the Dollar had what could be considered a light week overall in terms of data. As mentioned, the greenback mainly gained ground off the back of news headlines and escalations causing a flight to its safe-haven status. This also benefitted currencies such as the Swiss Franc and Japanese Yen.
US news was somewhat limited, with the equivalent Services & Manufacturing PMI numbers the most notable. The metrics showed a considerably stronger picture than European equivalents, with the Services sector continuing to outperform.
With a few weeks to go until the next Federal Reserve meeting, comments from policymakers took centre stage. Austan Goolsbee called the current policy position a “critical moment”. He believes further rate cuts are to come to reach a stable interest rate, but these will be at a slower pace than has been the case since the summer.
Michelle Bowman who broke ranks in a more cautious approach to cuts a few months ago, is still urging caution from her Fed colleagues. Her view is that she hasn’t seen much by the way of progress in bringing inflation down recently. This was an opposing view to colleague Lisa Cook, who is “confident in the disinflationary process” and sees further cuts coming.
Michael Barr meanwhile didn’t comment on monetary policy in his appearance. He simply stated like his boss Jerome Powell, that he won’t be leaving his post if incoming President Trump tries to fire him.
Current market estimates put the chances of an interest rate cut at 55% for the next Fed meeting in a few weeks.
Over in Europe, the latest inflation figures also arrived. Like in the UK, these also saw a bounce back up from 1.7%, but only as high as 2.0%, conveniently bang on the European Central Bank’s target. Without the sizeable energy price increases in the UK, the main upward factor in the bloc was from the services sector driving the overall numbers.
The move isn’t expected to catch the ECB by surprise, given they have for some time been forecasting inflation will bounce back up in the latter part of the year. Their meeting-by-meeting approach is likely to be adhered to in the December gathering as they continue on the path of normalising interest rates, whilst trying to boost economic growth.
During 2025, it is expected that the European Central Bank will really get moving with their policy cuts. Market forecasts at present are for 75 basis points of rate cuts in the new year from the Federal Reserve, versus a sizeable 150 points from Frankfurt. Whilst the Fed have the luxury of a buoyant economy to fall back on, the ECB needs to cut rates to stimulate growth across its economy, hence the projected rate cuts.
Other EU data releases last week demonstrated the struggle on the continent. Friday’s raft of Manufacturing & Services PMI numbers were all under expectation across the major EU countries. These were down heavily on last month and also demonstrating contraction. Consumer confidence figures also saw a drop.
Overall, the single currency lost fractional ground versus sterling, but as mentioned hit a two-year low against the safe haven US Dollar. Sterling-Euro movements can be seen below:
The week ahead:
Monday – BoE Lombardelli speech (09:00 UK time), BoE Dhingra speech (10:00)
Tuesday – BoE Pill speech (08:00), US Conference Board Consumer Confidence (15:00)
Wednesday – RBNZ rate announcement (01:00), US Prelim GDP & Unemployment Claims (13:30), Core PCE Price Index (15:00), Federal Reserve meeting minutes (19:00)
Thursday – US BANK HOLIDAY, Spanish Flash CPI (08:00), RBA Bullock speech (08:55)
Friday – UK Mortgage Approvals (09:30), EU CPI Flash Estimate (10:00)
Into the final week of November we go, with market events slightly thinner on the ground. But given that most of the FX movement last week was caused by geopolitical events, that doesn’t mean we are in for a quiet week.
In the UK, mortgage approvals data appears on Friday morning, preceded by a smattering of speeches from Bank of England policymakers. Those speaking are unlikely to say anything too surprising, given their firm stances on monetary policy already. Huw Pill, in his position as the Bank’s Chief Economist, may carry expectation for the most interesting of the set.
Eurozone news is also limited, with Spanish inflation readings on Thursday, before the bloc as a whole on Friday. A bounce in inflation could well define the policy path of the ECB, but given the widespread growth concerns, barring a big jump we should see another cut in a few weeks.
In the US, a week more of festivities than anything else. Ahead of Thanksgiving on Thursday, and the spending spree of Black Friday, there are some data releases. Consumer confidence figures arrive early in the week, followed by preliminary GDP figures. These project a growth of 2.8% in Q3, which would be close to the 3% seen in Q2.
The highlight of the week will be the minutes of the most recent Federal Reserve meeting, which land on Wednesday night UK time. Powell and his colleagues are never shy on discussing the contents of their policy meetings, but the release will be interesting nonetheless.
Given all the volatility of late, movements of 7% in two months are inevitably going to impact businesses and individual’s pockets. Should such swings be of a concern to you, make sure to reach out to the team and we can discuss solutions to protect your budget.
Have a great week.
