ACM Update 15-07-24
Buoyant economic growth in May saw sterling very much on the front foot last week. The Pound reached the highest levels in two years versus the Euro as the French election fallout continued. We also saw Sterling-Dollar move to the highest in 12 months too, off the back of US inflation softening once more.
Geopolitical events aside, we have a busy week with the next ECB meeting on the horizon on Thursday. Prior to this, the UK’s latest inflation and unemployment numbers make an appearance, followed by the Federal Reserve’s Beige Book.
We saw the best week in a while for sterling last week, coinciding nicely with Sir Keir Starmer’s first full week of having his feet under the desk at Number 10. UK GDP for May was recorded as a monthly growth of 0.4%, which was double the 0.2% estimate. There was favourable growth in all sectors, especially construction, being boosted by renewed appetite for house building.
However, whilst the boost in GDP might be good news for the new Government, it does reduce the likelihood of an interest rate cut in the Bank of England’s 1st August meeting. Alas, not such good news for homeowners. This was backed up further by three MPC members also stressing concerns about ongoing inflation.
Jonathan Haskel was one of those, stressing that he “would rather hold rates at 5.25% until there is more certainty that inflation pressures had subsided sustainably”. Unrelated, but the August meeting will also be Haskel’s last on the MPC, with his successor to be decided by the new Chancellor Rachel Reeves.
The Bank’s Chief Economist Huw Pill, himself kicked the rate cut can down the road by declaring that the timing of a rate cut was an “open question”. Pill too remains concerned about the potential for inflation to nudge back up later this year.
Head of the hawks, Catherine Mann, also dampened any chances of a cut from her corner too. She stated that the recent drop in inflation was a “touch and go” moment. Instead she sees inflation going back up from the current 2% for the rest of the year. She cited wage growth and services sector prices as her areas for concern.
Interestingly, based on the above comments, we have both UK inflation and unemployment data to come this week, which could have a strong say in the direction of GBP for the second half of July. Current estimates suggest inflation could drop fractionally to 1.9%, under the Bank of England’s mandate.
Despite all this, the UK growth figures and the political turmoil on the other side of the Channel Tunnel, meant GBP moved up by 0.8% versus the Euro last week. We hit a high last seen in July 2022, thus presenting a great opportunity for Euro buyers.
Last week’s movements can be seen in the chart below:
On the European side of the coin, little of note (aside from the football). No major data releases crossed, but the fallout from the French election rumbles on as the scramble for a coalition continues. Given the anti-Europe desires from the left-wing election victors, we could we be in a position of instability for the bloc and thus the Euro itself. All this with the Olympics less than two weeks away.
This week sees the latest European Central Bank meeting on Thursday. Given the seemingly overzealous move at the start of June from the ECB, one would expect to see rates held, followed by a calm and measured press conference from Lagarde. No more over-promising from Frankfurt!
US inflation meanwhile dropped to 3.0% in June, matching the post-pandemic low it hit in the same month last year. The main factor this time around was lower petrol prices. Overall, prices dropped by 0.1% between May and June, marking the first monthly decline in 18 months. The Dollar fell as a result, as optimism builds that the Federal Reserve may now feel comfortable with a 31st July rate cut.
Fed Chair Jerome Powell was testifying in front of the House and Senate financial committees last week too, and as one would expect he was quizzed on the policy outlook. He stated (before the above CPI release) that the Fed would not look at a rate cut until inflation data was “good enough”.
Given the CPI release, are we now in a situation where it is good enough, with inflation at a three year low? The US PPI inflation release did show a rise of 0.2% though, versus a 0.1% expectation for May to June.
The GBP-USD climb last week can be seen below:
The week ahead:
Monday – Eurogroup Meetings, Fed Powell speech (17:00 UK time)
Tuesday – Eurozone ZEW Economic Sentiment (10:00), Canada CPI inflation (13:30), US Retail Sales (13:30)
Wednesday – UK CPI inflation exp 1.9% (07:00), Eurozone Final CPI (10:00), Fed Barkin speech (14:00), Fed Waller speech (14:35), Federal Reserve Beige Book (19:00)
Thursday – UK Unemployment/Claimant Count/Average Earnings Index (07:00), ECB Rate Announcement (13:15) & Press Conference (13:45)
Friday – UK Retail Sales (07:00), Canada Retail Sales (13:30), Fed Williams (15:40) & Fed Bostic speeches (18:00)
Whilst the above releases are as important as ever, geopolitical risks now seem to be more important again than market events. The Euro is suffering very much from the French fallout. Donald Trump’s attempted assassination over the weekend may (miraculously) be positive for his campaign. Plus the UK Government are trying to get a grip of the economic situation whilst their residence in Number 10 is still in its infancy.
Of the events to come, UK data sees inflation on Wednesday morning, expected to show a dip to 1.9%. This would be against the above-mentioned comments from MPC members last week, expecting the metric to move back up. This is then followed by the Average Earnings Index (wage growth) data on Wednesday morning, as part of the Unemployment release. These two sets of figures could be pivotal for the next Bank meeting.
In the US, the build up to the next Federal Reserve meeting (31st July) begins with Wednesday evening’s Beige Book release.
For those buying EUR and USD, we have a great opportunity at the moment. One would expect this week to be quite crucial for both pairs. For any pending transactions and risk management strategies, do reach out to the team.
Have a great week.
