ACM Update 03-06-24
With a four-day week in both the UK & US last week, conditions were slightly quieter than has been the case of late. Sterling briefly nudged to its highest in 21 months against the Euro on Wednesday morning, before falling back.
Now five months into the year, expectations at the start of 2024 were for a plethora of interest rate cuts to have been delivered by now, from the Federal Reserve, Bank of England & European Central Bank. None thus far, but this week is widely expected to deliver the first from “the big three”, via Christine Lagarde & colleagues in the latest ECB meeting.
Whilst we only saw narrow ranges of movement last week, some of the figures recorded were significant and marked highs for GBP, against both the Euro and US Dollar. With UK elections in a month, European elections this coming weekend, and a certain Mr Trump making his own headlines last week, the stability isn’t likely to last for long….
Starting off in the UK, following on from Monday’s bank holiday there was little by the way of significant data releases. Of what there was, the data was broadly favourable. Tuesday morning’s release of the Confederation of British Industry’s realised sales figures recorded their best metric since December 2022. A further positive for the high street as the economy continues to bounce back in 2024.
On the housing market side, UK mortgage approvals matched their high of the previous month. This was the best for 18 months in fact, since “Trussenomics” began causing havoc in the sector in the autumn of 2022. Lender Nationwide also recorded a growth of 0.4% in average house prices in May, after negative readings in the previous two months.
Aside from those minor releases, there was little of note going on in the UK, which left Sunak & Starmer to battle it out for the headlines. With the election now little over a month away, the Labour party seems to have in the region of a 20-point lead in most current polls. Thus far, the markets are yet to be moved by such information.
A common question in the last ten days from clients has been “what reaction would the pound have if Labour/Conservatives won the election?” The present state of sterling flux suggests financial markets currently remain impartial on the outcome. However, from experience based on the FX movements following the 2010 election, a hung parliament would be by far the most sterling-negative result. Currently this looks the least likely to transpire, but perhaps more to come on that topic as we get nearer to 4th July.
As mentioned, a relatively flat week for sterling bar the brief nudge up on Wednesday morning and the slight losses later in the week.
In the Eurozone, the latest Flash CPI inflation data was by far the biggest release, especially given the events to come this Thursday. The figure suggests a slight rise in inflation in the bloc during May, back up to 2.6% having maintained 2.4% for the last two months. Markets had been expecting a smaller nudge to 2.5%, thus the figure did cause some wobbles.
The larger than expected increase is fairly unlikely to influence the movements of the European Central Bank this week though, where we still expect to see their first rate cut of the current cycle. It does however call into question the prospect of further rate cuts to come this year, and does likely rule out the chance of back-to-back cuts in June and July.
The prospect of less interest rate cuts in the bloc was enough for the Euro to recover half a per cent versus both the Pound and US Dollar throughout the morning on Friday. The Eurozone being made up of an assortment of countries, makes such figures a challenge to compile so quickly. The respective figures from Spain, France & Germany all recorded lower than forecast inflation, whilst the Italian figure was as expected.
The ECB are still highly likely to proceed with their widely “promised” rate cut this week. A Reuters poll of 82 economists last week showed all of them still saw a 0.25% cut as the expected outcome from this Thursday’s meeting. The move is unlikely to cause masses of movement, whilst language surrounding further policy changes will be what to look out for.
Movements last week for Sterling-Euro can be seen in the chart below:
The four-day week in the US didn’t see a shortage of releases there though. Whilst Donald Trump’s court case (the current one) took all the headlines, the former President’s antics aren’t causing any direct correlation to Dollar movement thus far. So for now, we will leave those stories to the tabloids!
Friday afternoon’s Core PCE Price Index release was very much the biggest US economic event of the week though. The metric is the Fed’s chosen inflation measuring tool and matched expectations for April. The move saw the Dollar strengthen by circa 0.5% during the afternoon, as stable inflation is unlikely to motivate the Federal Reserve to be jumping to rate cuts any time soon.
The Preliminary GDP release for Q1 though, does show that the US economy is beginning to slow under the weight of higher interest rates. Bureau of Economic Analysis figures, released on Thursday, suggested a growth of 1.3% in Q1, which if confirmed would mark the joint-lowest since the second quarter of 2022.
The other big release was the Federal Reserve’s “Beige Book”, which took place on Wednesday evening. This provides the information for the next meeting of the rate-setting committee, two weeks after. The data confirmed the above GDP release suggesting slight growth nationally, with many areas witnessing a slight slowdown in the rate of expansion.
Growth, inflation, the jobs market and overall public spending will be the key areas for discussion when the Fed make their next policy decision on 12th June. For now, overall consumer confidence seems strong which is equally important.
Fed policymakers themselves remained equally positive last week too, broadly suggesting that inflation measures are “moving towards the target range” and that a further rate hike shouldn’t be required to hit the 2% inflation target.
We saw roughly a 1% range on GBP-USD last week, with the Dollar achieving a slight gain overall. Recent movements on the pair can be seen in the chart below:
The week ahead:
Monday – SPA/SWI/ITA/FRA/GER/EU/UK Manufacturing PMI (08:15-09:30 UK time), US Final Manufacturing PMI (14:45) US ISM Manufacturing PMI (15:00)
Tuesday – UK BRC Retail Sales Monitor (00:01), Swiss CPI inflation (07:30), US JOLTS Job Openings (15:00)
Wednesday – Australian GDP (02:30), SPA/ITA/FRA/GER/EU/UK Manufacturing PMI (08:15-09:30 UK time), ADP Non-Farm Employment Change (13:15), Bank of Canada rate announcement (14:45), US ISM Services PMI (15:00)
Thursday – Eurozone Retail Sales (10:00), ECB rate announcement (13:15) & Press Conference (13:45), European Elections (6th to 9th June)
Friday – UK Halifax House Price Index (07:00), US Non-Farm Payrolls & Unemployment (13:30)
So a big start to June then with the following central bank announcements coming up over the next few weeks:
- European Central Bank – Thursday 6th June
- Federal Reserve – Wednesday 12th June
- Bank of England – Thursday 20th June
The choreographed cut from the ECB this Thursday seems somewhat nailed on, however the accompanying comments and releases will paint a clearer picture on what is to come for the rest of 2024. The announcement will include the usual Lagarde press conference shortly after, but also the ECB’s quarterly forecast too. Markets are (currently) expecting two rate cuts in Europe this year and any suggestion of more would likely be Euro-negative.
Also to be noted are the European elections which take place from Thursday to Sunday. Voters will choose their candidate in the 27 respective countries, potentially causing waves for the Euro itself dependent on outcomes.
The Federal Reserve meanwhile are now into their blackout period in the run-up to the 12th June meeting. Policy is unlikely to change in the US, leaving Jerome Powell’s comments to be of more significance than the rate announcement itself. As always, the Dollar is also slightly supported by its safe haven status amidst the continued geopolitical tensions in the Middle East.
Alongside the ECB, the first week of the month is, as always, about US jobs data. The range of releases will culminate on Friday with Non-Farm Payrolls data and Unemployment. The former is expected to show a similar number of jobs added to last month at 185,000 with unemployment projected to remain stable at 3.9%.
Broadly a quiet week for UK data. A few pieces of housing data at best. The usual start of the month round of Manufacturing and Services PMI figures from Europe, the UK and US appear on Monday and Wednesday respectively. These are likely to be the biggest movers aside from the ECB and US jobs numbers already mentioned above.
With elections, interest rate announcements and significant geopolitical events, we are likely to see more volatility this week than we have seen for a while. Protecting your foreign exchange risk is important as always, so ensure to reach out to the team for any pending payments you might have.
Have a great week.
