ACM Update 13-01-25
Sterling-Dollar moved down by some 3% last week, hitting a 14-month low by Friday, which extended further this morning. This was through both sterling weakness as UK Government borrowing costs rose and buoyant US data. The December Federal Reserve minutes were also released, with a focus on Trump 2.0 uncertainty ahead.
For this week, UK data comes back into the spotlight with the latest CPI inflation, GDP and Retail Sales releases arriving in the second half of the week. The US and Eurozone both also see inflation announcements in the coming days.
In theory, US jobs data should have been the main focal point last week, but UK goings-on proved to be a major driver. Sterling took a hammering, especially against the USD where we saw lows dating back to November 2023. The pair dipped under 1.22 and the Dollar strength saw prices in the 1.02s versus the Euro, itself a two-year low.
Starting off with the US though, the first full trading week of 2025 was full of significant releases. Dollar data continues to outperform, which combined with the possibility of Donald Trump’s policies accelerating inflation once more, have put the greenback well and truly in the ascendancy.
The Dollar has been firmly on the front foot since the most recent Federal Reserve meeting in mid-December. The minutes of this meeting were released last week, which saw a forecast quarter-point cut from policymakers. However, the change of narrative for 2025 was the big takeaway, and this was covered more in the minutes.
Trump was the big factor, and with his policies expected to drive inflation back up in the US (and likely elsewhere), the Fed have been forced into a more cautious path forwards. As mentioned last week, expectations prior to December’s meeting were for 150 basis points of cuts in 2025, but this was reduced to half that amount after the committee had digested the outcome of November’s election victory.
Whilst not referencing the incoming President by name, concerns about “changes in immigration and trade policy” on the US economy, got at least four separate mentions. This new cautious approach makes it very likely that the 29th January meeting will see the Fed hitting the pause button and holding interest rates for the first time since their July meeting.
The vast remainder of US data was jobs-related, starting off with JOLTS Job Openings increasing in November’s figure to 8.1m vacancies. This took the reading back to a high last seen in the June data.
Once again, Friday lunchtime’s Non-Farm Payrolls (NFP) data for December overdelivered hugely, coming in at 256,000 jobs added to the US economy. Major investment banks had projected between 120,000 and 200,000 jobs, thus showing how much of an over-performance it was.
The NFP release further solidifies the chance of a rate hold from the Federal Reserve in a fortnight, as a strong US jobs market will require no reduction in interest rates. Unemployment also fell to 4.1% from 4.2% last month, another figure which just 3% of investment banks called correctly.
Amidst a number of Fed policymakers speaking last week, the consensus seems to be for patience and fewer rate cuts to be the order of the day for 2025. Further rate cuts “will come, but not imminently” said Patrick Harker, whilst the often-cautious Michelle Bowman suggested she thinks the committee are now done with their cuts. A data-driven approach seems most likely, kicked off by this Wednesday’s inflation release.
As mentioned, the Dollar surged during the week. Recent movements on GBP-USD can be seen in the chart below:
Where to begin on the UK side of things. As the yields on UK Government 10-year bonds rose to their highest since 2008 last week, GBP bore the brunt. Such a move brought back murmurs of Liz Truss’ economic policies and her longevity battle versus a lettuce. All this in the same week the former PM sent a legal cease and desist letter to Sir Keir Starmer, over his continued claims that she “crashed the economy”.
The increase in Government borrowing (GILTS) is bad news for the UK for various reasons. The increase in these costs mean the amount of interest the Government are paying on debt rises, thus eating into tax revenues and forcing the Chancellor to make some tough decisions. Increase taxes, or reduce spending? Both of these would likely impact the spending power of the UK public, at a time when they are already feeling the pinch. This won’t help the Reeves-Starmer economic growth pledge either.
Major retailers such as Tesco and Marks & Spencer both hit out at Reeves last week too. The former suggested that UK food prices are only going one way this year, as the pending National Insurance changes in April are going to cost the business £250m per annum.
Meanwhile the Chancellor herself reacted to the market turmoil by jetting off to China. Reeves claimed to have secured a trade deal worth “£600m to the UK economy over the next five years” during her venture. How will closer ties between the two countries go down with Donald Trump one wonders.
In terms of scheduled UK events…. The only main one was a speech from Deputy Bank of England Governor, Sarah Breeden. She suggested that recent data “supports the case to withdraw policy restrictiveness gradually over time”, but admitted it was difficult to know how quickly rates should fall. She also mentioned she was waiting to see how employers respond to the Government’s incoming tax hikes.
For now, we seem to be back to a slow and steady approach to rate cuts from the Bank of England in the year ahead. Unfortunately for now though, the turmoil in the GILT market saw sterling firmly on the back foot across the board last week.
For the Eurozone, the single currency also bore the brunt of the Dollar strength, that combined with little significant data released. The ECB’s latest Economic Bulletin confirmed that the disinflation process on the continent remains on track, expecting CPI inflation to average 2.1% in 2025. However, growth is not expected to match the same (slight) gains in Q4, as were seen in Q3.
The notes also referred to what it called “greater friction in global trade” (AKA Trump). Other potential risks mentioned included the wars in Ukraine and the Middle East, both of which could disrupt energy supplies. It also discussed climate change impacts and extreme weather events, which seems timely following the tragic events in California in recent days.
Elsewhere for Europe, Services PMI data improved marginally from 51.4 to 51.6 over the last month, showing a slight expansion. The unemployment rate for the European Union remained static at 6.3%, itself a historic low. The CPI Flash estimate (released in advance of this week’s accurate figure) suggests that inflation bounced back up last month, so we will wait and see if that is accurate.
Movements during the week on GBP-EUR can be seen in the chart below:
The week ahead:
Monday – US Federal Budget Balance (19:00 UK time)
Tuesday – BoE Breeden speech (08:30), US PPI inflation (13:30), Fed Williams speech (20:05)
Wednesday – UK CPI inflation (07:00), US CPI inflation (13:30), Fed Beige Book (19:00)
Thursday – UK GDP (07:00), ECB Meeting Minutes (12:30), US Retail Sales (13:30)
Friday – UK Retail Sales (07:00), EU Final CPI (10:00), Bank of England Quarterly Bulletin (12:00)
In what can be described as an intense start to 2025, the focus seems to be firmly on the UK Government and the Federal Reserve. For the former, nervousness in the financial markets is unlikely to subside imminently, as concerns about the Reeves-Starmer economic plans continue to bubble. This is not helping GBP in early trading for the new week.
In the US, the question now seems to be are the Fed done with their rate cuts? This would mark a massive change from just a few months ago, but with a buoyant jobs market and concerns around Trump and other geopolitical events pushing inflation back up, it is looking more and more possible.
Into the new week, the Dollar is already off to a strong start as Asian markets digest Friday’s Non-Farm data overperformance. There are some major US data releases this week too, in the form of the latest inflation and retail sales numbers. That alongside the Beige Book release of Fed data, will give a clearer picture on what to expect in the January policy meeting in two weeks.
On the UK side, Wednesday onwards contains important UK data. Inflation is projected to remain at 2.6% for a second month, but any increase in the reading would likely result in even more certainty of the Bank of England holding interest rates in three weeks’ time. November GDP arrives 24 hours later, forecast to show a 0.2% monthly growth. If so, this would be the first monthly increase since the 0.2% August figure. Retail sales close out the week on the UK side.
Amidst a smattering of German data releases, Eurozone news will be mainly driven by the latest ECB Minutes on Wednesday lunchtime. Given the transparency of Lagarde & Co of late, these are unlikely to produce too many surprises on upcoming policy.
If the start of the year has taught us anything, it is that caution must be exercised in the current climate. Movements of 3% plus in some currencies seem to be commonplace at present, with the Dollar on the front foot and the Pound very much on the back.
Aston does have offerings to help protect clients against market movements, so make sure to reach out to the team to discuss the potential of forward contracts for any requirements over the coming months.
Have a great week.
