ACM Update 07-11-22
Halloween came and went last week with no frightening surprises for the markets. Whilst ‘relative calm’ and ‘stability’ is pushing it, a modicum of normality has returned. Expectations around interest rate hikes were met by the Federal Reserve and the Bank of England. However, messaging on future rate rises from the Fed Chairman, Jerome Powell, and the Bank of England Governor, Andrew Bailey, differed.
The Bank of England and the Federal Reserve both raised rates by 75bps. The UK rate sits at 3% with the US in a band from 3.75%-4%. The Bank of England Governor, Andrew Bailey, pushed back against market expectations that interest rates would need to hit 5% to keep a cap on price rises. The argument being that this would push inflation to zero, and below the Bank’s target rate of 2%, triggering a recession and forcing more people into unemployment. Could we have a deflationary environment towards the end of 2023? Possibly. The result of the comments around rates? Sterling was sold off. We traded just above the 1.1150 figure.
You can view the recent movements in the graph below –
The Federal Reserve provided some mixed messaging although the Dollar was firmly bid after the press conference. The Fed Chairman said there was “some way to go” to curb inflation and suggested that interest rates would likely peak higher than previous forecasts. I would expect the Dollar to remain in the ascendency going into year end and Cable (GBP/USD) will struggle to push significantly higher. If you hold USD, please reach out to the dealing team at Aston and they can discuss technical levels with you to implement take profit orders to capture any further moves in your favour. Could we be back below 1.10 by year end? Quite possibly. If you have exposure going into year-end, make sure you have a strategy in place to take advantage of moves whilst limiting downside risk.
We had the release of the NFP (Non-Farm Payroll) figure on Friday with a print of +261K against expectation of +193K. The US October unemployment rate rose to 3.7% vs 3.5%. Cable (GBP/USD) headed south after the release with a break below 1.12 the figure then we had a shift higher to over 1.13 with a bout of Dollar weakness. The dollar got a bit of a kicking on Friday afternoon although I expect GBP/USD to be pressured to the downside before year-end. An interesting development is the potential relaxation of China’s Covid and how this is going to impact inflationary pressures. If you would like to discuss recent movements, please reach out to me directly.
Sterling/Euro
From a GBP/EUR perspective we were trading in the 1.14s on Friday with a high of 1.1665 for the week.
You can view the recent movements in the graph below –
Sterling was sold off on the back of reduced expectations of future UK rate rises. The UK will have to contend with fiscal tightening and recession will weigh on UK PLC. There will be further rate rises in December and February although questions persist around the level of hike. However, UK assets remain appealing, and this should give Sterling some wind in its sail relative to the Euro. Indeed, the economic outlook in the Eurozone (worsening manufacturing figures for Germany/France/Spain) and reduced expectations around future rate rises as inflation, it is argued, derives mainly from supply side issues will limit any significant upside for the EUR. I would expect short-term GBP and EUR to continue to slug things out although I will be surprised if GBP/EUR doesn’t regain the 1.16 level by year end.
If you have any requirements around Sterling/Euro, please reach out to the team and they will be happy to chat through your specific requirements in detail.
Releases for the week ahead –
Eurozone Retail Sales (YoY) (Sep) – print of 2.9% expected against previous -2%
US Consumer Price Index ex Food & Energy (YoY) (Oct) - print of 6.9% expected against previous 6.6%
UK Preliminary GDP (QoQ) (Q3) – print of -0.1% against previous 0.2%
Have a fantastic week
