ACM Update 17-06-24
Sterling has continued to benefit from Euro weakness, with the pound hitting fresh highs last week, dating back to August 2022 versus the single currency. This now marks five consecutive weeks of gains on the pair, this time assisted by French snap election nerves.
US data came thick and fast, with the Federal Reserve opting to hold interest rates on Wednesday evening, as widely expected. This Thursday sees the turn of the Bank of England where a hold in policy seems likely, but with less certainty than their counterparts in the US last week.
Despite little by the way of major data UK releases last week, sterling saw another week of upward movement against the Euro. As the fallout from the snap election called by Emmanuel Macron continued, this was the main driver. But more to come on that.
There were some pieces of UK data last week to help things along, however the majority of them caused little by the way of market movement. Tuesday morning saw the release of the latest round of Unemployment data, which showed a mixed picture for the Bank of England to consider. Overall unemployment rose from 4.3% to an unexpected 4.4%. This also marked the fourth monthly increase in a row for the metric.
The number of those claiming benefits showed a much bigger increase than expected too. In fact, the May increase was the biggest monthly rise since the February 2021 figures, with the UK amidst another round of lockdown measures at the time. It seems that higher interest rates are now having a knock-on effect on the employment market.
However for those in jobs, the average earnings index is still recording wage growth well above inflation. In fact, the metric increased for the first time in nine months. The move suggests that pay increases are likely continuing to fuel inflation, making it more of a challenge for the Bank of England to cut rates.
In terms of the performance of the overall economy, the raft of figures released on Wednesday morning painted a far from rosy picture. UK monthly economic “growth” was confirmed as 0.0% for April. Rising unemployment and flat GDP didn’t seem to be headlines that Rishi Sunak felt the need to shout about though.
The National Institute of Economic & Social Research (NIESR) suggested in their own estimates a total growth in the three months of March-May at 0.7%. This would at least demonstrate some positivity if correct. However, the Construction Output, Industrial Production and Manufacturing Production figures for April all showed a sizeable negative move.
As already eluded to, Eurozone news was largely dominated by the snap French election called late last Sunday evening by President Macron. Contagion fears of far-right gains have certainly been widespread across the continent since, putting the Euro on the back foot against many major currencies.
The French stock exchange also endured its worst week since March 2022, down by over six per cent. The first round of the election takes place in just two weeks, on Sunday 30th June. This is likely to be a major driving factor in the fortunes of the Euro in the months ahead.
ECB President Christine Lagarde saw fit to dodge a question on the French market turmoil meanwhile, when quizzed on Friday. Speaking at a conference in Dubrovnik, Lagarde was asked about whether the ECB would use an emergency bond-buying scheme to support France, but replied that she had no intention of commenting on domestic political situations. She followed up by simply stating that “it is the duty of the ECB to deliver on its mandate and to keep inflation under control and back on target”. Nicely avoided Christine.
For now, the ECB must keep all eyes on their monetary policy stance. The interest rate cut of two weeks ago at the time seemed possibly premature, but the Bank had promised it for so long they almost had to deliver. The fact that Lagarde and co have no desire to even discuss further cuts, suggests they too realise they may have overpromised.
As mentioned, French politics were the main driver on Sterling-Euro last week and saw the pair very briefly cross 1.19 for the first time in 22 months, before retracing.
Recent movements can be seen in the chart below:
Wednesday last week was a busy day for US Dollar-related data. This saw the unusual instance of US CPI inflation data being released on the same day as the latest Federal Reserve announcement. These being two of the three biggest US monthly releases (the third being Non-Farm Payrolls), we were always likely to see movement.
Lunchtime saw the CPI release, with May’s inflation recording a fall to 3.3% and a fraction lower than the 3.4% markets were expecting. Such a move led to around 0.8% worth of Dollar losses within the hour as expectations rose for additional rate cuts this year, easing the pain on mortgage-holders.
Later the same evening, the latest interest rate meeting from the Federal Reserve saw policy remain unchanged for a seventh consecutive meeting. This always seemed highly likely to be the case, despite the “excitement” caused by the inflation data.
The big news however was an upward revision to the Fed’s own inflation projections for the year. This accordingly saw the number of 2024 rate cuts expected from the committee drop back down to just one again. As a result, despite a 1% range over the course of Wednesday, we opened at very similar levels come Thursday morning.
Fed members over the weekend maintained their stance that the committee are in a position to take their time on rate cuts. If there is to be one rate cut this year, policymaker Neel Kashkari expects it to be towards the end of 2024. This currently seems a fair estimate.
An incredibly volatile week for the Dollar with 1.5% movement, but overall closing just 0.2% away from where markets opened. Movements for the week can be seen below:
The week ahead:
Monday – Rightmove House Price Index (00:01 UK time), G7 Meetings
Tuesday – Reserve Bank of Australia rate announcement (05:30), Eurozone Final CPI (10:00), US Retail Sales (13:30)
Wednesday – UK CPI Inflation (07:00), US BANK HOLIDAY
Thursday – Swiss National Bank rate announcement (08:30), Bank of England rate announcement (12:00), US Unemployment Claims (13:30), Fed Barkin speech (20:30)
Friday – UK Retail Sales (07:00), FRA/GER/EU/UK/US Manufacturing & Services PMIs (08:15-14:45)
Week one of June was the ECB, week two the Federal Reserve, and now the third week brings us the Bank of England. One cut, one hold and one…… probable hold.
Despite there being a few other central bank interest rate announcements this week, all eyes will be on the UK releases of Wednesday and Thursday. Similarly to the US last week, inflation and an interest announcement are wedged very closely together this month in the UK. Andrew Bailey predicted correctly that April’s inflation would show a sizeable drop, but will we see the same for May’s numbers?
Figures released at 7am on Wednesday are forecast to show a drop to 2.0%, which is otherwise known as precisely the Bank of England’s inflation target. However, this is unlikely to be enough for us to see an interest rate cut the following day.
It is however possible that the voting split may be impacted amongst the nine members, in further signs that the Bank are getting ready for rate cuts soon. Therefore, we expect interest rates to remain at the current 16-year high. The next MPC meeting after this one comes on 1st August.
Over the weekend, further opinion polls for the UK election seem to be suggesting even more of a landslide majority for Sir Keir Starmer. His Labour party seem to be very much in the driving seat for the 4th July vote, but the polls are yet to show any massive impact on GBP’s direction of travel.
The Eurozone also sees its latest round of CPI inflation figures released on Tuesday morning, expected to show a slight nudge up to 2.6%. This is a further figure which suggests the ECB may have gone too soon and overpromised with their rate cut of two weeks ago. However the majority of the focus will remain on the French election situation, where further gains for Marine Le Pen’s party would cause concern for other EU leaders.
The US enjoys a shorter week with markets closed there on Wednesday for the Juneteenth bank holiday. The only real data release there will be amongst the latest round of Manufacturing & Services sector PMI figures from Europe and North America, released throughout the day on Friday.
Given we have a third week in a row of significant central bank meetings, one would expect to see a further week of sizeable market movements. With movements of circa 1.5% from week to week, costs of invoices for businesses and property payments for individuals are fluctuating considerably. Should you find yourself impacted by such movements, make sure to reach out to the team to discuss relevant risk management solutions.
Have a great week.
