ACM Update 17-03-25

Foreign exchange markets traded sideways last week, during a relatively flat few days. In the US, recession fears mounted as a result of Trump policy, with the President himself suggesting the public should be prepared for “a little disturbance” short term. In the UK, January’s GDP data saw the economy contract marginally.

The week ahead is a bumper one full of events. The most notable ones being the latest interest rate announcements from both the Federal Reserve and the Bank of England, on Wednesday & Thursday respectively.

Currency markets may have been flat, but stock markets were anything but in the US last week. Donald Trump’s policies are not reflecting well in US share prices, where concerns about a looming recession and a projected spike in the cost of goods, is hitting markets hard. The S&P 500 fell to its lowest in six months.

Despite this, the President continued his trade war last week, with further retaliatory tariffs against the EU and Canada. He even went as far as threatening tariffs of 200% on EU wine, spirits and champagne…

Before he came into power, Trump pledged his America would deliver a new era of prosperity. He still stands by this, but last week had to warn voters of “a little disturbance” in the short term. Some of the big banks are building in a far greater chance of a US recession as a result of recent policy moves. JP Morgan being one of those, now suggesting a 40% chance, up from 30% at the turn of the year.

All of this is weighing heavily on the US Dollar. With inflation projected to rise, growth to fall and stock markets tumbling, we can see why. This week’s Federal Reserve meeting comes at a crucial time, with various new parameters to consider.

On the subject of US inflation, the February figure was released last week and showed inflation rising marginally less than expected, by 2.8%. The forecast was a shade higher at 2.9%. Despite the good news, the figure was relatively overlooked as it took place prior to the majority of the recent tariff changes coming into effect. The Producer Price Index meanwhile, showed no monthly inflationary uptick. A short-term win for the Fed perhaps, but it could be very short-lived.

Two major US consumer sentiment figures released on Friday also provided bad news. The University of Michigan data showed consumers expect inflation to hit 4.9% in the next 12 months, in what would be a major jump. This marked the highest figure for the metric since November 2022. In the same set of data, consumer sentiment was recorded as its lowest (least confident) since May 2023 with a reading of 57.9 down from 64.7 last month.

In slightly positive news, the US Senate managed to pass a stopgap spending bill on Friday evening. This prevents a partial government shutdown by increasing the debt ceiling. For now at least…..

Movements on GBP-USD last week can be seen in the chart below:

In UK news, January turned out to be another drab month for the economy. Having delivered 0.4% worth of monthly growth in December, January in fact saw a contraction of -0.1% in GDP, much to the dissatisfaction of the Government. Sir Keir Starmer and Rachel Reeves pledged growth as a key priority last summer but are yet to deliver on this promise.

The looming tax rises in April are increasing concerns of a sustained slow period for UK growth. Expectations are for consumers to hold back in their spending habits as a result, as well as businesses being more cautious about new hires. This was one of the factors that led to the Bank of England recently halving their growth forecast for 2025, down to 0.75%.

Estimates for recent UK growth remain cautious too. The Office for National Statistics (ONS) is suggesting a mere 0.2% for the quarter to January, whilst the National Institute of Economic and Social Research (NIESR) estimate 0.4%. We can expect more thoughts from Rachel Reeves on the topic in her Spring Statement, taking place in the Commons in ten days’ time.

Other UK releases were relatively minor, with the British Retail Consortium suggesting a marginal growth of 0.9% annually in like-for-like sales. Meanwhile RICS house price growth figures suggested a slowing picture.

The Eurozone side of things was somewhat quieter too, following on from their interest rate cut the week before. Christine Lagarde spoke at an event in Frankfurt as part of the latest Eurogroup meetings. The ECB President continues to express her concerns that the Eurozone will be facing “exceptional shocks” in the areas of trade, defence and climate-related issues.

Lagarde suggested this was the main reason that the rate-setting committee see it as “impossible” to provide any reasonable forward guidance on their policy intentions. She did however suggest that it makes getting inflation back to the 2% target, even more important. Will this prevent a sixth consecutive rate cut in the next meeting?

In a quiet week on the continent for data, German figures showed a healthy increase in Industrial Production during January. The output figure rose 2.0% in the month, the best reading since August’s data.

Sterling-Euro traded narrowly, with around 0.8% worth of weekly range. The biggest mover came after UK GDP underachieved first thing on Friday morning, taking around 0.5% off the Pound throughout the morning.

The week ahead:

Monday – US Retail Sales (12:30 UK time)

Tuesday – German & EU ZEW Economic Sentiment (10:00), Canadian CPI Inflation (12:30)

Wednesday – Bank of Japan rate announcement (03:00), EU Final CPI inflation (10:00), Federal Reserve rate announcement (18:00) & Press Conference (18:30)

Thursday – UK Unemployment (07:00), ECB Economic Bulletin (09:00), Bank of England rate announcement (12:00), BoE Bailey speech (12:30)

Friday – UK Public Sector Net Borrowing (07:00), Canadian Retail Sales (12:30)

A total of three major central bank meetings take place this week, with the Federal Reserve, Bank of England, Swiss National Bank and Bank of Japan all announcing their latest policy changes. Having entered 2025 sitting pretty, confident in the economy, with a buoyant jobs market and inflation under control, the Fed are now in a much more precarious position. Trump’s tariffs have caused great uncertainty and we can expect much more debate on monetary policy in this meeting.

Whilst it seems unlikely that Jerome Powell and his colleagues will move to cut interest rates this time around, we can expect much more cautious language in his press conference. Phrases along the lines of “we are ready to act if required” seem likely. The US picture remains uncertain in the early stages of Trump 2.0 in 2025.

UK news will be predominantly about Thursday lunchtime’s Bank of England meeting. Despite the unanimous calls for a rate cut last time around, we can expect the “cautious and gradual” stance to continue. Markets expect the two rate-setters who wanted a larger cut in early February (Catherine Mann & Swati Dhingra) to vote for a further cut in this meeting. However, that would still leave them outnumbered 7-2.

Having lost ground recently to the Euro, an interest rate hold should provide a little support for the Pound. Unemployment data, also on Thursday, will give some information on how the jobs sector is moving, ahead of tax changes next month. Government borrowing data arrives on Friday morning.

Another reasonably quiet week on the continent, bar the continued stone-throwing between Trump & the EU. German data releases arrive early in the week, followed by the latest ECB Economic Bulletin on Thursday morning.

A key week ahead then for monetary policy on both sides of the Atlantic. The Bank of England now seemingly have the easier decision, despite that not looking to be the case a few weeks back. These rate decisions are likely to cause plenty of volatility around the middle part of the week, so ensure to reach out to the team for more information on ways to protect your currency transactions.

Have a great week.