ACM Update 05-06-23
Mixed messages from the Federal Reserve, followed by another bumper non-farm payrolls number, started June with plenty of volatility. Meanwhile, at least one member of the MPC thinks inflation is going to remain a problem in the UK for a good time to come.
A stronger week for sterling last week with GBP-EUR hitting highs last seen back in mid-December, peaking at 1.1672. This was mainly down to weaker than expected Eurozone data. On UK soil, the main talking point was a speech from the Bank of England’s chief hawk, Catherine Mann. She believes that the UK has a far bigger inflation problem than the US and Eurozone.
Mann thinks that British businesses are more likely than others globally to pass on price rises and increased wages to end customers, essentially protecting their own profit margins. This is somewhat backed up by the fact that the UK had the joint highest inflation in April (with Italy at 8.7%) of the world’s “big advanced” economies.
Nationwide HPI figures also hampered GBP last week. The monthly change was a drop of -0.1% in May, alongside an annual shrinking of -3.4%, which is the biggest annual drop since July 2009 (following the financial crisis).
As eluded to above, Eurozone data performed pretty poorly last week, seeing the single currency shed over 1% against a number of majors. In fact, the Euro has now closed the week lower against the Dollar for the last five weeks in a row.
Wednesday saw sub-par figures from Germany in the form of Import prices, as well as French consumer spending and GDP. Thursday morning’s releases didn’t fare much better, with a raft of Eurozone manufacturing numbers landing on or short of expectation. The latest inflation flash estimate came in at a falling 6.1% for the bloc as a whole, whilst unemployment remains stable at 6.5%.
The minutes from the latest ECB meeting were also published on Thursday, showing greater divide between the bank’s policymakers over future policy. In May, only Austrian member Robert Holzmann wanted a 50 basis point hike, but other members wanted language to convey a “clear directional bias” for ongoing decisions. A June hike now seems a formality, followed by one further in either July or September.
Recent movements on Sterling-Euro can be seen in the chart below:
The Dollar had a volatile week itself though. Comments from Philadelphia Fed member Harker on Thursday about a June pause in rate hikes led to a weakening USD. This was compounded by a speech from fellow policymaker Philip Jefferson later in the day, with similar commentary.
Friday’s Non-Farm Payrolls took most of the headlines, coming in above expectation for the 14th month in a row. 339,000 jobs were added to the US economy in May, versus the forecast of 193,000. The previous month was also revised up. Unemployment overall rose to 3.7% though. The data releases saw the Dollar recover some of Thursday’s losses and may well mean the aforementioned Fed members have to backtrack on their comments about a pause in rate hikes in June.
Recent volatility on Sterling-Dollar demonstrated in the chart below:
This week:
Monday – Services PMI Data EU/UK/US (08:15 to 15:00 UK time), Christine Lagarde Speech (14:00)
Tuesday – Australian Interest rate announcement (05:30), Eurozone Retail Sales (10:00)
Wednesday – Halifax HPI (07:00), Bank of Canada Interest rate announcement (15:00)
Thursday – US Unemployment Claims (13:30)
Friday – Canadian Unemployment Rate (13:30)
Into June we head, and into a new range on GBP-EUR. This is the first time we have ventured outside of the 3% channel we have found ourselves in since mid-December. Given the inflationary picture in the UK, as well as the raft of poor data coming out of the Eurozone in recent weeks, we are in a favourable position for those moving GBP to Euro at the moment.
Data releases on both sides are relatively thin on the ground this week though, other than Christine Lagarde’s speech on Monday afternoon.
For GBP-USD, any narrative towards the direction of the next Fed meeting is unlikely to emerge, given policymakers are now in their “blackout period”, leading into their next meeting on Wednesday 14th June. As a result, the Dollar is likely to be largely driven by the sporadic releases this week such as Services PMI & Unemployment data.
If you have any pending requirements to discuss, then reach out to the team this week and we will be happy to assist, as always.
Have a great week.
