ACM Update 07-05-24
Dollar events were the focal point last week, with the Federal Reserve meeting and Non-Farm Payrolls both arriving. The Fed seem set on holding fire for now on any upcoming policy changes, whilst the jobs market slowed a fraction.
UK data will be in the spotlight this week, as the clock ticks down to the Bank of England meeting on Thursday. A rate cut seems unlikely here too, but the voting pattern and Andrew Bailey's press conference will be of importance. A number of speeches from Monetary Policy Committee members, plus the GDP release on Friday morning, close out the week.
Most of the market focus was indeed over in the US last week, as both the latest Federal Reserve meeting and Non-Farm Payrolls data for April took place. Despite these being two of the biggest US releases of a month, the Dollar ended the week pretty much where it started against the Pound, but did lose against the Euro.
Starting off with Wednesday evening’s Federal Reserve meeting, as expected we saw interest rates held steady in the US. The move was widely forecast and thus caused little by the way of market movement. The proceeding Jerome Powell press conference half an hour later though, was always destined to provide the more detailed information on future policy, and it did, sort of.
Following on from interest rates remaining at a two-decade high, we saw the Fed Chairman deliver a much less hawkish tone than some had expected. Despite the sticky nature of US inflation, Powell suggested that borrowing costs are likely to remain at their current levels, rather than potentially raising them further.
The other side of the coin though, is that Powell did not explicitly state that he saw interest rates cuts from the Federal Reserve as a certainty for this year. He simply stated that it will likely take longer (for himself and other central bankers) to gain enough confidence in the fact that inflation is still on a downward trajectory.
In terms of what this all did for the Dollar? Very little against GBP, but it did lose ground versus the Euro for the third week in a row. The picture in the US still remains that interest rate cuts can be expected once economic data provides concrete evidence of the aforementioned downward trajectory.
The other big US release for the week was Friday afternoon’s Non-Farm Payrolls data, which demonstrates the performance of the employment sector via the number of jobs added to the economy the previous month. April demonstrated a slight slowdown to the recent pace, with 175,000 jobs added versus a forecast 238,000. The move did cause a very temporary weakening of the Dollar by about half a per cent, which quickly evaporated.
Released in parallel, overall unemployment ticked back up a shade to 3.9%, the joint highest reading for the metric since February 2022. For now, market focus seems to be more on inflation-linked releases, unless something very drastic happens to the employment sector, the strength of which is buying the Fed time before it gains the confidence to cut.
In other releases, US unemployment claims remained constant when compared to the previous week. The jobs market overall shrank though, with 8.49m job openings reported, the lowest since May 2021. The Manufacturing sector remained in reasonably good shape.
In the UK, local elections were the biggest talking point of the week. These saw the Conservative Party suffering a slew of defeats, in what has been seen as a lack of confidence in Sunak & his cabinet at the top. The local council defeats were followed-up by a raft of mayoral victories for members of Sir Keir Starmer’s party.
The result didn’t impact on FX markets too much though, given the general election is yet to even be announced. In comical news, former PM Boris Johnson was turned away from a polling station having forgotten to bring along his ID, a policy his government introduced in 2022.
As we run towards this week’s Bank of England meeting, the recent differences of opinion amongst the nine-strong voting committee will come into focus. Whilst we don’t expect there to be an interest rate cut in this meeting, how the members vote this time will be incredibly insightful as to whether the June meeting will deliver policy change.
The March meeting saw one for a hike, eight to hold and none wanting a cut. Any deviance from this would provide Sterling volatility on Thursday lunchtime. Given recent opinions from the nine, a change in the voting pattern is more than plausible and would demonstrate further moves towards the first UK rate cut.
Overall, it was the significant US data which dominated FX proceedings last week on GBP-USD, as shown in the chart below:
Meanwhile in Europe, the main topic of monetary policy discussions now seems to have moved on somewhat. Despite not having 100% committed to an interest rate cut in their June meeting, the European Central Bank’s “data driven” stance has pushed towards the 6th June delivering the first cut, with some degree of confidence.
The CPI Flash estimate for inflation (the earliest release of the month) arrived for April last Tuesday and suggested the metric remained at 2.4%, just above the bank’s 2% target. As always, there is a split across the different nations, but overall the bloc seems to be in a good place and ready for an interest rate cut soon.
Macroeconomic discussion has now shifted to how rapidly the ECB can set about cutting interest rates, following the June meeting. There were various comments on the topic last week from their policymakers. Member Klaas Knot and the ECB Chief Economist, Philip Lane, both suggested a meeting-by-meeting and cautious approach needs to be the way forwards.
On the current data releases, Spanish member Pablo Hernandez de Cos believes that the bank are increasingly confident that they are on the right path to their inflation target. These words gave even more backing to the June rate cut. The ECB’s Vice President, Luis de Guindos, however urged caution that he does not expect inflation to remain consistently back at their 2% target until next year.
The Euro was boosted by a better-than-expected GDP release for Q1, with growth of 0.3% versus an expected 0.1%. Thus overall, we saw a better week for the Euro, as illustrated in the GBP-EUR chart over the last week, below:
The week ahead:
Monday – UK BANK HOLIDAY
Tuesday – Reserve Bank of Australia rate announcement (05:30 UK time), UK Construction PMI (09:30), EU Retail Sales (10:00)
Wednesday – FRANCE BANK HOLIDAY, Fed Jefferson speech (16:00), Fed Cook speech (18:30)
Thursday – FRA/GER/SWI BANK HOLIDAY, Bank of England rate announcement (12:00), BoE Bailey speech (12:30), US Unemployment Claims (13:30), BoE Pill speech (17:15)
Friday – UK GDP (07:00), BoE Pill speech (12:15), ECB Meeting Minutes (12:30), BoE Dhingra speech (12:45), NIESR GDP Estimate (14:00)
A shorter week for us in the UK, with the spring bank holiday having taken place on Monday. There are also bank holidays on Wednesday and Thursday too in some Eurozone countries (France, Germany & Switzerland).
As already mentioned, the Bank of England meeting on Thursday will certainly be the highlight of the week. Recent press conferences from the MPC members have produced vary opinions on policy, so the voting pattern will be important. The meeting will likely have a big impact on sterling’s trajectory going forwards, so do ensure to reach out to protect any trades you may have coming up.
The raft of UK data releases on Friday morning and speeches from Huw Pill and Swati Dhingra, should provide a bumper end to the week in terms of GBP activity. Is the UK economy already out of recession in Q1?
In the Eurozone, with GDP exceeding estimates for growth in the last quarter, the single currency is on a slightly more stable footing, so that positivity could continue. This would be to the detriment of those looking to sell GBP and buy Euros.
As always, reach out to the Aston team with any queries or requirements which you may have.
Have a great week.
