ACM Update 01-07-24
Elections, elections, elections. The second half of 2024 is now upon us, and begins with pivotal elections on either side of the English Channel. The French voting process is already underway, whilst Sunak and Starmer go head-to-head on Thursday in the UK.
Economically-speaking, these past six months were expected to deliver a plethora of interest rate cuts globally as central banks got inflation back under control. Only the ECB and the Swiss National Bank have taken the first step so far, but even they may have gone too soon.
Starting off in the UK, the first half of 2024 has been relatively positive for the pound. With interest rates starting the year at high levels and inflation moving back towards the Bank of England target, GBP had been expected to be on the back foot with interest rate cuts expected to start coming thick and fast. But Andrew Bailey and his MPC colleagues urged caution, despite a better economic outlook.
At the start of 2023, UK inflation was at 10.5%, at the start of 2024 we had 4.0%, and the latest reading (for May) showed we are back on track at 2.0%. With a general election on our doorstep though, and concerns around inflationary pressures still persisting in some sectors, the Bank of England have maintained their policy, which has been to the benefit of the currency. Sterling has held strong as interest rate cuts having been pushed back further, seeing GBP-Euro hitting a high in early June which dated back to August 2022.
With the economy back on track seemingly, the broad economic picture looks much more positive than when this writer was regularly having to write about the shallow UK recession at the turn of the year. Indeed, just last week it was confirmed that GDP for Q1 recorded 0.7% of growth, its best since Q1 of 2022. The picture looks favourable for the UK, but will be largely dependent on the political outlook as well as the monetary policy situation.
Aside from the above GDP reading, last week was relatively quiet on the data front. The Confederation of British Industry figures did show somewhat of a drop in sales for the high street, by significantly more than expected too. Industrial orders also fared the same, recording a poor figure. There are certain economic sectors still struggling under the pressure of higher interest rates.
For various reasons, a Bank of England interest rate cut a month today (1st August), looks a likely outcome, barring any political earthquakes in the UK post-election. Inflation in many countries has nudged back up in the last month or two though, thus such an outcome is not yet a foregone conclusion. The next UK inflation release comes on 14th August.
Moves in the first half of the year for GBP versus the Euro can be seen in the chart below:
Looking back at the first half of the year in the Eurozone, at the turn of 2024 it was almost impossible to think that the European Central Bank would have been the first to jump on cutting interest rates. With Frankfurt well behind the Bank of England and Federal Reserve in hiking, it looked highly likely that this would be the case in terms of cutting interest rates too.
Lagarde & Co moved from their usual fence-sitting approach to providing essentially a promise of an interest rate cut, a couple of months before their June meeting. Was this the right move to promise so far ahead in such a rapidly changing economic landscape? Only time will tell, but currently the answer I would suggest is a no.
Inflation has remained sticky on the continent for some time, and in fact the first reading after the ECB’s early June rate cut saw in fact a slight bounce back up in the cost of living. This is not the first time that Eurozone inflation has (either as expected or unexpectedly) bounced back up this year.
In positive news, the German economy does seem to have turned a corner and is moving in the right direction for the first time in a while. Hopefully hosting the Euro 2024 tournament will continue moving their economic figures positively.
Whilst the ECB refused to be drawn on commenting on “national politics”, the committee will no doubt be concerned about any potential ramifications from the current French elections. Since the snap vote was called just three weeks ago, support for the far-right National Rally party has surged, with (at the time of writing) some 33% of yesterday’s first round votes projected. Emmanuel Macron who called the election, languishes in third place.
Currently it does not look that Marine Le Pen’s party will have enough to win an outright majority in the second round of voting next Sunday. This is a move which has calmed markets, and offered the Euro some support on Monday morning. However, the party are now the dominant political party in France, regardless of next Sunday’s outcome.
The outcome of the above vote and the widespread ramifications of it throughout the other 26 member states, will likely be key to the fortunes of the Euro for the second half of the year.
Over in the US, 2024 dawned with a projected six interest rate cuts to come during the year as inflation began to fall. But the US metric has remained stubborn, bouncing between 3.1% and 3.5% year to date. As a reminder, this figure was a mere 6.5% at the dawn of 2023.
Americans have continued to spend freely, thanks largely to the Biden support systems in place as the US emerged from Covid a couple of years ago. The flipside of that though, is that strong spending has meant prices could remain high as the demand was there from consumers. Also, fuel prices have remained high, which is always to the detriment of the US gas-guzzling V8s.
So for now, the USD has been supported by the likelihood that interest rates there will remain high for some time to come. Indeed, the USD strengthened some 4.5% between mid-March and mid-April versus GBP, when it became apparent that US interest rates were going to remain high for the foreseeable.
Six interest rate cuts in the year now looks more likely to become just one, as the Fed urge caution on upcoming policy. They want to ensure inflation is well under control before beginning the cut rates. This seems wise given the metric is yet to breach 3%, let alone 2%.
For now, the world’s safe haven currency looks set to remain in the ascendency, with economic performance and stubborn inflation allowing interest rates to remain at their current high levels for the foreseeable future. The US economy grew 1.4% in Q1, further supporting this stance.
Indeed, the US has an election of its own to come in November. As is well known, the first televised debate took place last week amidst bizarre scenes from Trump and Biden, both of whom would be octogenarians by the end of the incoming term.
Moves year to date for Sterling-Dollar can be seen below:
The week ahead:
Monday – SPA/ITA/FRA/GER/EUR/UK/US Manufacturing PMIs (08:15-15:00 UK time), ECB Lagarde speech (20:00)
Tuesday – Australian Monetary Policy Minutes (02:30), EU CPI Flash inflation estimate (10:00), ECB Lagarde & Fed Powell speeches (14:30), JOLTS Job Openings (15:00)
Wednesday – SPA/ITA/FRA/GER/EUR/UK/US Services PMIs (08:15-15:00 UK time), ECB Lagarde speech (15:15), Federal Reserve meeting minutes (19:00)
Thursday – UK Elections (ALL DAY), US Bank Holiday (ALL DAY), ECB Monetary Policy meeting minutes (14:30)
Friday – EU Retail Sales (10:00), US Non-Farm Payrolls (13:30), ECB Lagarde speech (18:15)
Sunday – French election second round (ALL DAY)
With less than 3% worth of movement in H1 of 2024, Sterling-Euro would have to be described as “rangebound” at best. But given the changes in the political landscape in the second half of the year, that could all change very quickly. We expect to see more volatility through political and geopolitical events to come.
The second round of the French election this weekend will be crucial not only for France, but for the Eurozone as a whole. A National Rally majority for now seems unlikely, but still a possibility nonetheless.
On the UK side of the coin we have the Sunak-Starmer face-off coming up this Thursday too, with the latter expected to see a comfortable victory. This has already been priced in to GBP’s fortunes, but a real landslide for Labour could well see sterling move upwards.
Meanwhile the “should he-shouldn’t he” debate on Joe Biden’s campaign continuation will likely rumble along during the week. Manufacturing and Services PMI data releases are going to be some of the larger data talking points, prior to the US jobs data releases later in the week. Non-Farm Payrolls being the biggest of the lot on Friday, wedged in after Thursday’s Independence Day in the US.
Elections, elections, elections are likely to deliver a volatile H2 of 2024. Strap yourselves in and the Aston team will be here to help you every step of the way. Make sure to get in touch for assistance on protecting your purchases.
Have a great week.
