ACM Update 21-10-24
UK inflation was the major driver for the Pound last week, as the metric came back down to 1.7%. The move seems to almost cement an interest rate cut from the Bank of England in the early November meeting, and potentially a further cut in December too. This didn’t stop GBP-EUR nudging to a fresh two-year high though.
As we edge ever-nearer to the US election, this week is more focused on speeches from key policymakers from all corners of the globe. IMF meetings also take place throughout the week.
Sterling spent last week on a rollercoaster. Three big data releases all showed good signs for the UK economy, albeit not necessarily for the Pound itself.
Tuesday’s releases kicked things off and saw the Unemployment rate show a positive drop to 4.0%, as well as Average Earnings cooling to 3.8%. The latter is significant for the Bank of England’s upcoming monetary policy, as wage growth had still been running hot over the summer, but now seems to be calming. The only real fly in the ointment was the Claimant Count figure which ticked up a shade.
The headline news though was that (headline) inflation in the form of CPI dropped to 1.7% in the year to September. This was better than the 1.9% forecast, also marking the lowest in almost three and a half years. Lower airfares after the summer break and a drop in fuel prices, were the biggest contributory factors.
Whilst inflation coming down to 1.7% is good news all round, Sir Keir Starmer and Chancellor Rachel Reeves will be especially overjoyed. Yes, it puts them in a good light, but secondly the September inflation figure is the same one used to calculate how much benefits go up by next year. Call me a cynic, but one could call it a very well-timed dip in inflation.
A November rate cut from Andrew Bailey and his colleagues now seems almost a certainty, with a follow-up in December now seeming likely too according to markets. The drop in inflation took circa 0.5% off the Pound on Wednesday morning.
UK Retail Sales figures for September were released on Friday and were also buoyant. With a -0.4% contraction forecast, a growth of 0.3% was definitely welcome. This means Q3 saw a total rise of 1.9% overall, and contradicts previous suggestions that consumers are downbeat about the looming 30th October budget from the Chancellor, Rachel Reeves.
The Retail Sales release did provide GBP with some respite after losses earlier in the week. The currency retraced back to similar levels seen prior to the inflation release 48 hours before. Overall GBP closed slightly up on the week versus the Euro, but saw a range of around 1% top to bottom. If 1% weekly movements on your Euro exchanges are causing concern, then make sure to reach out to the team.
GBP-EUR movements last week can be seen in the chart below:
In Europe, the latest Final CPI figure for September in the bloc came in at 1.7%, mirroring the UK reading as it happens. A breakdown of annual inflation in selected countries in the bloc can be seen here: Ireland 0%, Italy 0.7%, France 1.4%, Spain 1.7%, Germany 1.8%, Netherlands 3.3%, Belgium 4.3%.
Meanwhile, core inflation in the bloc remains at 2.7%, which is still better than a number of other major economies.
Thursday’s rate decision from the European Central Bank was arguably the focal point of the week. With concerns flowing about growth on the continent, the ECB opted to deliver another 0.25% rate cut, as widely forecast. This now takes their main interest rate down to 3.4%.
President Christine Lagarde mentioned in her press conference that there are still upside risks to inflation though, as the Bank expects the metric to tick back up during the final quarter of the year, then “dropping to target in 2025”.
Despite this, markets now seem to believe that the flood gates have opened for ECB cuts ongoing. Even with Lagarde’s continued messaging of future rate cuts being “data dependent”, it does seem that growth concerns will be a big factor in any 50:50 decisions in future meetings. Stagnant growth has been haunting the bloc for some time.
Elsewhere, the German and EU-wide ZEW economic sentiment figures bounced back into far more positive territory, after a major drop last month. The figures measure pessimism/optimism from analysts, and saw a significant turn back towards the upside when compared to the previous month’s data.
Over in the US, after the Columbus Day bank holiday to start last week, Dollar activity was thus condensed into four days. Retail Sales data was arguably the biggest release of the week here, providing a bounce back to 0.4% monthly growth after a poor showing in August. Given the focus on the jobs and employment market from the Fed, news that consumers are still spending will be a great relief.
As usual, there were a number of Federal Reserve members speaking throughout the week. Policymaker Christopher Waller’s comments supported the Dollar early on, when he stated recent data had disappointed and urged a more cautious pace of cuts ongoing. Only two things would change his perspective, which were the job market deteriorating significantly or inflation falling well below 2%. One could argue that he is stating the obvious, but the comments tell markets that ongoing cuts aren’t nailed on.
Indeed, his colleague Neel Kashkari echoed this exactly, confirming that he too saw a slower pace of rate cuts to come, noting “as of right now, it appears likely that further modest reductions in our policy rate will be appropriate in the coming quarters to achieve both sides of our mandate”. More cuts are definitely coming from the Fed, but there seems to be widespread agreement that we won’t be seeing jumbo cuts again, like the initial one.
Elsewhere, Treasury Secretary Janet Yellen spoke, fearing that “sweeping untargeted tariffs” planned by Donald Trump would reaccelerate inflation. Perhaps another factor to consider should the Republican nominee succeed in the polls now just two weeks away.
Sterling-Dollar was also volatile, hitting its lowest in eight weeks at one point after the UK inflation data, before recovering some ground. Movements on the pair can be seen in the chart below:
The week ahead:
Monday – IMF Meetings (Day 1 of 6), Fed Kashkari (18:00 UK time) Fed Schmid (22:05) & Fed Daly speeches (23:40)
Tuesday – UK Public Sector Net Borrowing (07:00), BoE Greene speech (14:00), BoE Bailey speech (14:25), ECB Lagarde speech (20:15), BoE Breeden speech (20:15)
Wednesday – Bank of Canada rate announcement (14:45), ECB Lagarde speech (15:00), Federal Reserve Beige Book (19:00), BoE Bailey speech (21:30)
Thursday – FRA/GER/EU/UK Manufacturing & Services PMIs (08:15-09:30), US Unemployment Claims (13:30), BoE Mann speech (14:00), US Manufacturing & Services PMIs (14:45)
Friday – Canada Retail Sales (13:30)
More clarity now seems to be emerging on what to expect going forwards on interest rates from the big three banks. In Europe, one cut per quarter seems likely to have gone out the window now, with growth concerns the main priority. We expect a further cut pre-Christmas in the December meeting from Lagarde & Co.
In the UK, with inflation now at an identical 1.7% to Europe last month, a November and December pair of interest rate cuts from the Bank of England too seem likely. Economic growth, whilst a backbone of PM Starmer’s plan, isn’t exactly spectacular at the moment with just one month of the last three recording any at all. Interest rate cuts would hope to assist overall growth, as Bailey & colleagues have room to manoeuvre now inflation has retreated.
The big UK uncertainty remains in the form of Chancellor Reeves’ Budget on 30th October. Tax hikes are widely expected amongst a raft of changes, with concern that many of the amendments may have the opposite effect to what was desired.
In the US, after the euphoria of the jumbo rate cut to start the cycle, slow and steady seems likely to be the case going forwards. This approach would suit both a slowly falling inflation metric, as well as supporting the jobs market after it stuttered over the summer.
The two uncertainties for the Dollar – the Presidential Election and geopolitical events in the Middle East. Only time will tell how both of these will play out.
This week contains more speeches than anything else. Andrew Bailey’s are perhaps of most importance, as the Bank of England get nearer to their next decision. As we saw from the inflation release from the UK last week, any news on the topic will likely cause plenty of movement.
For any concerns or discussions on how to protect your upcoming currency transactions, make sure to reach out to the team this week via the usual channels.
Have a great week.
