ACM Update 11-02-25
As Trump continues to threaten more tariffs, the US economy shows no signs of nervousness around the new President’s policies. Jobs data released on Friday showed unemployment at its lowest since May last year, alongside a good month of jobs added, as well as an upward revision to December.
In the UK, the Bank of England committee all wanted interest rates to come down last week, resulting in an eventual cut of 0.25%. Some members wanted even more though, including the usually hawkish Catherine Mann, who has been speaking this morning.
Despite all of the uncertainty about US policy, the Dollar remains in a strong position six weeks into the new year. Whilst Trump is definitely causing some confusion as to his intentions, one thing is for sure in that the US economy itself is continuing to perform well. For now at least.
The latest US jobs data was released last week, producing another solid month of growth Stateside, albeit a fraction under overall expectations. We saw 143,000 jobs added against an expected 169,000 but it was the previous month’s upward revision which caught the eye. This was corrected to a bumper 307,000 and in turn the highest since April last year.
Overall Unemployment also moved in the right direction, dropping to 4.0% for the first time since the May 2024 figures. With Average Earnings rising slightly, consumers also have more spending power too. Needless to say, the Federal Reserve have very little pressure, or desire, to look at cutting interest rates any time soon.
The previous week saw a widely forecast interest rate hold in the US. As a result of the jobs data, markets have in turn realigned expectations, now seeing just one rate cut to come from the Fed this year. This is currently projected for Q3, however will be data dependent as always.
For now the Dollar remains in the ascendancy, but the elephant in the room remains, what will Trump do next? His seemingly global threats of tariffs could play out in all sorts of directions, depending on whether they get implemented or not. Inflation has the potential to go up or down as a result, so it seems natural that the Federal Reserve are playing wait and see for now.
Another strong week for the Dollar, with movements vs GBP as shown below:
Whilst the Bank of England rate cut last Thursday wasn’t a major surprise, the manner in which it was delivered very much was. The Bank’s rate-setting Monetary Policy Committee seem to have pivoted from concerns about inflation, to a growth-based mindset. Whilst this isn’t their mandate, it is something which they are keen to drive for the overall economy.
Their decision to cut rates last week was unanimous in the respect that all members wanted a cut, but some in fact wanted an even larger reduction than the 0.25% outcome. Two members, Catherine Mann & Swati Dhingra, saw the need for a bigger cut, with the former speaking this morning on the topic.
Mann stated she wanted to “cut through the noise” with a 0.5% cut, expressing concerns about the “weaker outlook for employment and the economy” than had been the case previously. She was clear though that most policymakers on the committee sought a more gradual path for rate reductions, so this is likely to be the outcome ongoing.
The Bank also provided some mixed messaging in their cut. Their own projections on inflation saw the metric potentially going up to 4% in Q3 of this year. This is another indication that growth is seemingly more of a priority than getting interest rates to 2%.
Governor Andrew Bailey also spoke regarding the lack of growth in the economy, referring to the “flat profile” seen since last spring. He expects growth to pick up throughout 2025 but has concerns about inflation heading back up through energy pricing in 2025, as well as the impact of recent Government policy.
On the other side of the coin, the Bank’s Chief Economist, Huw Pill, has urged caution for those expecting quick fire rate cuts this year in the UK. He is still focused on the work to be done on inflation, which is in line with the Bank’s own warnings.
It remains to be seen how the growth-inflation balance will swing over the next few months. For now though, the UK economy seems to be on a more uncertain path than it has been for a while. Interest rates remaining higher had been a major support to GBP in recent months, and if this picture changes then we may see some GBP negativity to come. That said, uncertainty is rife everywhere at the moment in the early stages of Trump 2.0…..
In Europe, amidst a scene of minimal growth and persistent inflation, Christine Lagarde is insistent that there is “no stagflation” in the bloc. The ECB President still maintains that there is a recovery taking place, but the economy is yet to reach its potential quite yet.
With Eurozone inflation falling to 2.5% in January, the ECB are still avoiding pressure to commit to a pre-set rate path, perhaps learning their lessons from last year. This came following a widely forecast rate cut ten days ago of a further 0.25%. Eurozone interest rates have now come down by 125 basis points since the middle of last year.
Concerns remain regarding the potential impacts of tariffs on an already fragile Eurozone economy. News today though threatening any tariffs on US goods to be reciprocated equally, are likely aimed at the EU. Watch this space, as the trade war started by Trump may well be about to escalate.
Sterling-Euro traded primarily on interest rate movements last week. Movements can be seen in the chart below:
The week ahead:
Monday – ECB Lagarde speech (16:15 UK time), President Trump speech (21:30)
Tuesday – BoE Mann speech (08:45), BoE Bailey speech (12:15), Fed Powell testimony (15:00)
Wednesday – US CPI inflation (13:30), BoE Greene speech (15:00), Fed Powell testimony (15:00)
Thursday – UK GDP (07:00), ECB Economic Bulletin (09:00), US PPI inflation (13:30)
Friday – US Retail Sales (13:30)
Going forwards, it looks likely that similar factors will continue to drive markets. Those are, the current lottery around Trump tariffs and foreign policy, alongside central bank rate decisions. The former seems to be more of a short-term focus, given then the next round of interest announcements are not for a month plus.
As always, the Aston team remain at your disposal to discuss any foreign exchange and payment needs you may have.
Have a great week.
