ACM Update 14-10-24
The most recent Federal Reserve meeting minutes were released last week, showing some debate on the size of the initial cut. The ECB minutes meanwhile showed increasing concern about growth in the bloc. In the UK, growth ticked back up in August, albeit fractionally.
This week unusually contains the next ECB meeting, where markets are expecting a further rate reduction. For the UK, Wednesday sees the latest round of UK inflation data which could potentially dip under the 2% target.
Across the board on the major currencies we saw less volatility by far than the previous week. That is unless you are buying or selling New Zealand Dollars, where a second consecutive (and widely expected) 0.50% rate cut still caused volatility. Like their European counterparts, the RBNZ are turning their focus to sluggish growth rather than tackling inflation.
Starting off in the US this week, where we are now less than a month away from the US election on 5th November. The vote seems as finely poised as ever, but is yet to impact the Dollar itself too much. For now….
The minutes from the September Federal Reserve meeting were released last week. These showed division between policymakers on what the size of their first rate cut of the cycle should be. A number of members expressed a desire to opt for a smaller 0.25% reduction, but ultimately it was just one member (Michelle Bowman) who voted for such a move. As mentioned before, this was the first dissent in 19 years from what is usually a unified Fed committee.
A number of policymakers referred to employment market concerns in placing their vote for a larger cut. Since that meeting though, jobs data from the US has perked back up, with overall Unemployment dipping and the September Non-Farm Payrolls release of ten days ago, arriving significantly better than the forecast number.
A more conservative path forward now seems to be the case, with a second consecutive 50 basis point cut now almost completely off the table according to many analysts. September’s CPI inflation figures were also released last week, providing further support to the US Dollar. These showed inflation fell from 2.5% to 2.4%, but not down to the 2.3% that markets were expecting. The meeting minutes and inflation data point to the fact the Fed may not need to be anywhere near as aggressive in their coming cuts.
That debate rages on though amongst policymakers, with suggestions in all directions of late. Vice-Chair Philip Jefferson suggested on Tuesday that the risks on the joint inflation and employment goals are now on a par with each other, which seems a fair assessment. Colleague Mary Daly suggested that the committee will continue cutting rates this year, with a focus on protecting the jobs market.
Atlanta Fed President Raphael Bostic is aware the jobs market is slowing, but believes it remains robust. He also opened the door for skipping a rate cut in the coming meetings if the data supports it. Lorie Logan meanwhile called for rate cuts to be more gradual ongoing.
Despite the array of suggestions, markets are currently pricing in an 80% chance of a 0.25% rate cut to come from the next Federal Reserve meeting in November. This backs the murmurings of Jerome Powell in recent days, who agreed with the current “dot plot” path, which suggests a total of 0.50% worth of cuts to come from the remaining two meetings this year.
The Dollar now seems significantly more supported than we have seen of late. An improved jobs market picture and inflation falling by less than expected, has given some renewed confidence in the Greenback.
Moves last week on GBP-USD can be seen in the chart below:
Back in the UK, it was all about economic growth last week. Not only was Sir Keir Starmer continuing to pitch his intentions for expanding the economy, but the latest GDP figures were released. These avoided the dreaded hat-trick of months of zero growth, delivering an expansion of 0.2% for the month of August.
The uptick was attributed to positive moves in construction, as well as accountancy, manufacturing and retail sectors. However, the Office for National Statistics who publish the figures, urged caution and suggested the September figures could well show a slowdown. This sentiment comes from firms pausing hiring staff and making investment-related decisions, until after the upcoming budget on 30th October.
With repeated rhetoric from Starmer and Chancellor Rachel Reeves declaring the budget will be “painful”, it isn’t too much of a surprise that this pause happening. The only other major release was the Halifax HPI data which showed a 0.3% uptick in September house prices, matching the previous month.
Sterling, for now, seems to have shrugged off the comments from Andrew Bailey the week before about potentially larger rate cuts to come. This week’s inflation figures could be pivotal for GBP though, as fall under the 2% target (as forecast), would increase calls for a larger rate cut.
On the continent, the latest European Central Bank minutes were also released. These displayed a committee increasingly concerned about the disappointing growth in the bloc, but one that is still incredibly reluctant to say that inflation is fully defeated.
However, due to a calendar reshuffle meaning that the next ECB meeting is this Thursday, the minutes were essentially almost outdated by the time they were published. At the time, the policymakers spoke about the desire for December to be the next ideal point for a rate cut, despite concerns about the well-known lack of growth. The final meeting of the year would also coincide with their updated economic projections.
That said though, data since this September meeting has seen inflation falling and weak performance indicators too. Despite the inflation figure being what the bank had projected themselves, it still begs the question of should there be another cut now that inflation is in fact under target. This Thursday’s vote now seems nothing more concrete than a 50:50 at present. A Bloomberg poll released last week seemed to favour a cut more than a hold.
The only other major release from the bloc was Retail Sales data which showed a 0.2% growth in August. This was in line with market expectations and in fact marked the best monthly figure since the March figures produced 0.8% growth. The Eurozone continues to struggle for growth across the board.
Sterling-Euro saw a very flat path across the week, moving little from the mid-1.19 range as shown in the chart below:
The week ahead:
Monday – US & Canadian Bank Holiday, Fed Waller speech (20:00 UK time)
Tuesday – UK Claimant Count & Unemployment (07:00), German ZEW Economic Sentiment (10:00), Canada CPI inflation (13:30)
Wednesday – UK CPI Inflation (07:00), ECB Lagarde speech (19:40)
Thursday – EU Final CPI (10:00), ECB interest rate announcement (13:15), US Retail Sales & Unemployment Claims (13:30), ECB Lagarde Press Conference (13:45)
Friday – UK Retail Sales (07:00), Fed Waller speech (17:10)
Looking at the three factors in play we discussed last week, the UK interest rate situation doesn’t seem to have changed much over the last seven days. However, inflation data this week will be pivotal in determining the path forwards. A dip under the 2% target for the metric could easily see the pound moving back downwards, as expectations for bigger rate cuts mount.
As well as the UK inflation figures on Wednesday, Retail Sales figures also arrive on Friday to close out the week. A negative move of -0.3% from August to September is forecast.
In the US, the Dollar seems stronger than we have seen of late. This is partly due to inflation remaining higher than hoped, but also the resilient jobs market holding firm. Geopolitically, the Dollar has also benefitted slightly.
On the Eurozone front, the chances of a further interest rate cut this week are finely poised. If the ECB are as determined to get growth moving as they state, then a rate cut would seem like their only option for now. But lingering inflation issues remain, thus we could see no action for now.
Should you have any requirements across the major currencies over the coming months, do make sure to reach out to the team for assistance on how to protect your risk. We are likely in for another bumpy week ahead of significant announcements.
Have a great week.
