ACM Update 28-05-24
UK inflation dropped by almost a full percentage point in April, which was enough for Rishi Sunak to take what most saw as a gamble in calling a UK Election on 4th
July. Is that enough to win over the electorate, and is inflation at 2.3% enough to prompt the Bank of England to cut rates on 20th June?
Despite this, GBP moved to within 0.1% of its highest rate in 21 months against the Euro. We also saw the highest Sterling-Dollar rate in two months.
Over in the US, the latest Federal Reserve meeting minutes showed concern from various policymakers about the stubborn nature of inflation. Whether this is starting to hurt the economy or not, we shall see this week, with the latest Preliminary GDP numbers from the States.
Despite the rain-soaked calling of an election last week from Rishi Sunak, the event hasn’t yet caused much by the way of FX volatility. In an election to be fought with the economy a likely main topic, Sunak & Co waited for April’s inflation reading, which was confirmed at 2.3%, before announcing a trip to the polls on 4th July. “Inflation is back to normal” the PM declared in his speech.
The reading was in fact fractionally worse than the 2.1% hoped for, but still showed almost a full percentage point drop vs the previous month. The main contributing factors were UK energy prices falling by 27% compared to 12 months before, with gas prices alone down 38% in the same period.
There were a number of other positive UK news releases aside from inflation last week. The IMF opted to upgrade the UK’s growth forecast for 2024 to 0.7% (up from 0.5%) and to 1.5% for 2025. In addition, they foresee two or three rate cuts in 2024 as “appropriate”.
UK consumer confidence figures for May were also released, showing the highest reading in two and a half years. Manufacturing & Services PMI numbers both showed growth.
Is all of this enough for the Bank of England to look at cutting interest rates in their next meeting on 20th June? In case they haven’t made their minds up by then, the May inflation figures are released on 19th June…..
The main speech from an MPC member came from Ben Broadbent, suggesting (as we already know) that a rate cut at “some time over the summer is possible”. The June meeting marks his last before leaving the voting committee in July.
The big miss in UK data was April’s retail sales number, recording -2.3% vs -0.5% expected. Rainy weather during the month was blamed for keeping shoppers away from the high streets.
Overall, a good week for GBP which ended just shy of a 21-month high against the Euro. Movements for the pair during the week can be seen in the chart below:
In Europe, little by the way of excitement last week. Manufacturing and Services PMI numbers continue to trend in the right direction overall. The German numbers were some of the most positive. On which note the German economy recorded 0.2% growth in Q1, which is the biggest growth and first positive number since Q3 2022.
A Christine Lagarde speech on Tuesday confirmed she is “really confident” that inflation in the bloc is under control. Given the ECB have all but confirmed a rate cut next week, chatter is now turning towards where rates will go in the months after that, despite back-to-back cuts having been ruled out.
That said, just this morning the French ECB member, Francois Villeroy de Galhau, said the suggestion of cuts in the two consecutive meetings shouldn’t be dismissed. Watch this space.
Over in the US, the latest Federal Reserve meeting minutes were released on Wednesday night. These showed some concern amongst the rate-setting committee about a lack of progress on inflation. In fact, “various participants mentioned a willingness to tighten policy further, should risks to inflation materialise”. Thus, the potential for another hike isn’t totally off the table yet.
However, the general consensus was that the current level is sufficient. Various Fed policymakers spoke last week and pretty much all were urging patience.
Christopher Waller’s Tuesday speech, stated that the bank “could consider cutting rates later this year” if there are several more months of good inflation data. The topic of US growth arose at the G7 meetings too, held last week. This is ever-poignant as the ECB edges closer to their own (promised) rate cut next week, but at the same time doesn’t want to be importing US inflation.
Movements on GBP-USD last week were upwards, as can be seen below:
The week ahead:
Monday – UK BANK HOLIDAY, US BANK HOLIDAY
Tuesday – US Conference Board Consumer Confidence (15:00 UK time)
Wednesday – Australian CPI (02:30), German Prelim CPI (09:00), Federal Reserve Beige Book (19:00)
Thursday – Spanish Flash CPI (08:00), US Prelim GDP (13:30)
Friday – UK Mortgage Approvals (09:30), EU CPI Flash Estimate (10:00), US Core PCE Price Index (13:30)
After a busy week last week politically and economically, the shorter week this week following the UK bank holiday has less substance than we have seen for a while. Election narrative and positioning is likely to be a factor in GBP this week, alongside murmurings from anyone on the Monetary Policy Committee.
The main event from the US will be the Federal Reserve’s Beige Book release on Wednesday night. This sees the publication of all recent statistics which the Fed will use in their next policy meeting on 12th June.
On the Eurozone side, the latest Flash Estimate of inflation will be released on Friday morning. This is expected to show a slight nudge up from 2.4% to 2.5% in May, a move not expected to impact the ECB’s decision the following week.
GBP remains in a strong position and we find ourselves at the top of recent ranges for GBP-EUR & GBP-USD. Make sure to reach out to the team for assistance on any requirements you may have upcoming.
Have a great week.
