ACM Update 02-12-24
A frantic November has drawn to a gentler close. The Dollar softened off the back of geopolitical events, amidst quieter trading conditions in and around Thanksgiving. Sterling closed up on the week versus USD for the first time in nine weeks, having lost 7% between 30th September & 22nd November.
This week sees midweek press conferences from the respective heads of the Bank of England, European Central Bank & Federal Reserve before Friday provides the latest Non-Farm Payrolls data. This is expected to show a bounce back to form, after the drab showing last month.
As we move into the final round of interest rate meetings for the year, there remains plenty of divergence in economic performance, inflation levels and thus policy direction. With each of the big three to meet before Christmas, financial markets seem to be clear on what they expect. As always, any outcome is possible though.
There was little to report data-wise last week from the UK. The latest edition of the half-yearly Financial Stability Report was released by the Bank of England on Friday. This mainly referenced geopolitical concerns from the panel, which are likely to continue ongoing. The knock-on effect on just how much these will impact inflation (via energy prices & shipping costs for example), remains to be seen.
Andrew Bailey also took a stab back at Chancellor Rachel Reeves in the press conference, stating how it is the Bank’s role to ensure financial stability, but there is no trade-off between that and growth. This comes after she recently blamed monetary policy on limiting growth.
The only other notable data release was mortgage approvals, now at their highest in 26 months as interest rates begin to subside. Good news for the housing market.
In her first speech since taking over the role, Bank of England Deputy Governor Clare Lombardelli raised her concerns about incoming US trade tariffs impacting UK growth and inflation. As a result, she backs a more gradual rate cut approach.
Fellow BoE policymaker Swati Dhingra sees the UK as no longer standing out as an inflation outlier amongst the advanced economies. She also suggested a lack of reliable data is hindering informed policy decision making. Chief Economist Huw Pill sang a similar tune, suggesting the jobs market isn’t as weak as official data is suggesting. Figures from the OBR (Office for Budget Responsibility) remain under the microscope.
The slight bounce back on GBP-USD can be seen in the chart below. That said, the pair is still 5.5% down on where it was just two months ago.
In the US it was a shorter week with the Thanksgiving bank holiday on Thursday. The US economy continues to grow at a very healthy pace, recording 2.8% worth of expansion in Q3, according to Preliminary GDP figures released last week. This was helped by Consumer Spending increasing by 3.5% in the period, its biggest quarterly gain of 2024. The GDP figure was just shy of Q2’s 3.0%, still demonstrating strong expansion.
The amount of economic growth and the resilience of the US jobs market is giving the Federal Reserve more flexibility in terms of policy decisions. Whilst inflation may not be fully squashed, a strong economy gives more of an ability to cut interest rates without fearing damage to overall economic performance.
Speaking of the inflation front, the Fed’s preferred inflation index of Core PCE edged up to 2.8% for last month, matching forecasts. The minutes from the latest Fed meeting were also released. These showed further confidence in inflation easing as well as a strong jobs market, despite the recent slowing.
Most US policymakers are comfortable with the inflation picture and see further rate cuts to come. The crucial word for the pace of cuts was “gradual”. The meeting having taken place just 48 hours after the Presidential Election, there was zero mention of the topic. We can expect this to be a firm discussion point in the next meeting though.
Eurozone news was pretty much all centred around inflation data last week, with an assortment of releases from the different nations. For the bloc as a whole, the latest CPI Flash Estimate shows a further nudge back up to 2.3% in November, matching what Lagarde & Co have been forecasting.
This movement back up in inflation is unlikely to reduce the chances of an ECB December rate cut though. In fact, French ECB member Francois Villeroy de Galhau thinks the committee should remain open to larger rate cuts in December. His priority is to get interest rates back to a level which stimulates wider economic growth.
Individually, there is a bit of variance between the countries. German inflation is at 2.2% (it was 2.0% in October). Spanish numbers were at 2.4%, up from 1.8% in October due to fuel & electricity price increases. In Italy, CPI moved to 1.4%, up from just 0.9% last month. French inflation fell slightly, whilst GDP for the country recorded a 0.4% growth in the third quarter.
Overall, it was relatively status quo on EUR-USD last week, but we saw a slight weakening for the single currency against GBP. The latter is shown in the chart below:
The week ahead:
Monday – SPA/SWI/ITA/FRA/GER/EUR/UK/US Manufacturing PMI (08:15-15:00 UK time), Fed Waller speech (20:15)
Tuesday – Swiss CPI inflation (07:30), JOLTS Job Openings (15:00), Fed Goolsbee speech (20:45)
Wednesday – SPA/ITA/FRA/GER/EUR/UK/US Services PMI (08:15-15:00), BoE Bailey speech (09:00), ADP Non-Farm Employment Change (13:15), ECB Lagarde speech (13:30), Fed Powell speech (18:45), Fed Beige Book (19:00)
Thursday – Uk Construction PMI (09:30), EU Retail Sales (10:00), US Jobless Claims (13:30), BoE Greene speech (17:00)
Friday – EU Revised GDP (10:00), US Non-Farm Payrolls & Unemployment (13:30), Fed Bowman speech (14:15), UoM Consumer Sentiment (15:00), Fed Goolsbee speech (13:30), Fed Hammack speech (17:00), Fed Daly speech (18:00)
Entering December, we come towards the final interest rate announcements of the year. All of the major central banks have announcements before Christmas, with the ECB seemingly the most likely to cut rates. The Federal Reserve’s decision remains in the balance, whilst the Bank of England look to be holding rates. Logically this should see sterling recover some lost ground, but geopolitical factors as well as other economic data releases will also be influential.
For this week, the start of a new month brings economic performance indicators in the form of PMI releases, as well as the latest round of US jobs data. With last month’s Non-Farm Payrolls figure recording the lowest since December 2020’s data, most analysts seem to be expecting a return to normality. Anything less could see a Dollar sell-off on Friday afternoon.
Aside from that, we have speeches from the big three on Wednesday. Andrew Bailey speaks at an online event for the Financial Times at 9am, Christine Lagarde gives a talk in the European Parliament in Brussels at lunchtime, whilst Jerome Powell is on a New York Times panel in the early evening. Any policy suggestions or hints could well cause movement.
Given the volatility we have seen over the last couple of months, ensure to reach out to the team if you have anything to be paid across soon. Rates will remain volatile in the lead up to the festive period, so protecting your foreign exchange payments is vital to keep a step ahead.
Have a great week.
