ACM Update 16-05-22

Written by: David Comber
Date posted: 16-05-22

If the last couple of weeks have taught us anything, it is that absolutely anything is possible in this climate. Sterling-Dollar moved eight cents in circa three weeks, cryptocurrencies shifted wildly, and the UK were popular in Eurovision. I am not sure which I was most surprised about.

The UK is still suffering the economic hangover from the Bank of England meeting of ten days ago, where the forecast interest rate rise was served up with a picture of doom and gloom. The prospect of slow growth, potentially double-digit inflation and a likely rise in unemployment is all looking very “stagflation-like” once again.

Confidence in GBP is very low at present, and this was increasingly apparent against the somewhat mighty of late US Dollar last week. At one point on Friday, prices dipped to as low of 1.2155 during the afternoon, before recovering a shade in late trading. This was a low last seen two years ago in May 2020, with the recent few weeks’ worth of movement shown in the chart below:


Given the slight up-tick late on Friday afternoon, there is potential for some recovery in the pair, but there is very little faith in both sterling and the Bank of England at the moment which is unlikely to help.

The raft of UK data released at 7am UK time on Thursday didn’t provide much by the way of support either. Preliminary GDP (quarter on quarter) came in at a tiny 0.8%, with the month on month number at -0.1%. Industrial and manufacturing production were both negative, with construction output the only remotely positive figure of the lot. All sectors of the economy are facing headwinds at the moment, and that looks unlikely to change.

On the other side of the Atlantic, we saw US inflation data released last week. Numbers dipped to 8.3% but are still tracking close to the 40-year high (8.5%) seen in March. Despite the slight fall, this is unlikely to stop the Federal Reserve playing catchup with their interest rate hikes over the coming months. Expect a further 50 basis point rise at the next meeting on 15th June.

President Biden also declared in a speech last week that he is “taking inflation very seriously”, calling it his “top domestic priority”. This is definitely a pressing issue for the Democrats leading towards the 2022 midterm elections.

Meanwhile in the Eurozone, the ECB seem potentially ready to move from their wait and see policy, to something with a little more substance. Christine Lagarde was speaking at an event celebrating the 30th anniversary of the Slovenian Central Bank on Wednesday. She stated that interest rates will increase in the bloc “some time after the end of net asset purchases”.

Whilst still deliberately vague, many market commentators decided that this now means a first interest rate hike is coming in the 21st July meeting. This would be the first interest rate rise in the Eurozone since 2011 which sparked the European debt crisis, wreaking havoc in Italy and Greece.

GBP-Euro hit its lowest level since September last week, with recent moves shown in the chart below:


Events This Week:

Monday – EU Economic Forecasts (10am UK time), UK Monetary Policy Report Hearings (3:15pm)

Tuesday – UK Unemployment (7am), US Retail Sales (1:30pm), Jerome Powell speech (7pm)

Wednesday – UK inflation (7am), Canadian inflation (1:30pm)

Thursday – Australian unemployment (2:30am)

Saturday – Australian Elections

We are faced with a packed economic calendar this week, with a number of big releases to come. The main driver of sterling will be Wednesday’s inflation data, with the headline figure now expected to hit 9.1%, now that the recent energy price rises have taken effect. Last month the number was 7.0% for context, so quite an impact.

In the US, expect retail sales to be the focus as any slowdown in this area could force them down the stagflation path too. Powell’s speech on Tuesday evening will as always be listened to for subtle clues.

Saturday sees the Federal Election take place in Australia, where Scott Morrison's Liberal-National coalition is looking to secure a fourth consecutive term in office. Labor, led by Anthony Albanese are the opposition and opinion polls suggest a closely fought affair.

Those selling Dollars at the moment are still in a very strong position given the recent moves, and a two-year peak is a difficult one to look past. The team have been incredibly busy of late looking after clients selling USD, so if you are in a similar situation then do reach out.

Volatile times lie ahead, so please do get in touch with any pending requirements.

Have a great week.