ACM Update 21-11-22

Written by: David Comber
Date posted: 21-11-22

Inflation in the US may have started to fall, but that isn’t yet the case in Britain with another 41-year high in October, well above market estimates. Chancellor Jeremy Hunt unveiled his budget, thankfully without the financial meltdown we saw after the Truss-Kwarteng mini budget of September.

Elsewhere the G20 meetings took place in Bali, whilst the COP27 climate summit in Sharm el-Sheikh overran by two days. Progress was made at the latter, despite a comical number of arrivals to a climate summit being by private jet…

The UK was the focal point of data releases last week with a raft of events. Sterling has had a better few weeks against a lot of its peers, and this continued with slight positive movement throughout. GBP is now up over 7% in the month versus the Dollar.

UK inflation (released last Wednesday) continues to soar. Unlike in the US, where numbers are beginning to fall back, the UK CPI figure hit a further high of 11.1%, jumping 1% on an annualised basis compared to the September numbers. This high dates back to October 1981 and despite the best efforts of Bank of England policy makers, looks set to continue on an upward trajectory.

The main contributors continue to be the cost of energy, up 128.9% and 65.7% over the 12-month period. It is worth noting that without the government’s energy price guarantee, calculations show the annualized figure would have been circa 13.8%. Prices for food continue to outrun the headline figure, whilst petrol/diesel falling back did help numbers slightly.

The above means we are likely to continue to see further interest rate hikes from the Bank of England on 15th December, further squeezing those on variable rate mortgages. Current expectations are for an uplift of 0.5%, taking the base rate up to 3.5% and its highest since November 2008. Admittedly, Bailey and Co have very few options at their disposal.

Also on UK shores, Unemployment quickly bounced back from its 50-year low of 3.5%, settling at 3.6%. This is largely believed to be driven by people dropping out of the jobs market altogether post-COVID. The number of those claiming benefits came in under expectation also, supporting the above theory. Other UK releases were house prices from Rightmove which showed a 1.1% contraction in October, and retail sales growth for the same period of 0.6%. Retail sales going positive for the first time in three months is a bit of respite for retailers perhaps in the run up to Christmas.

To finish off the UK-based wrap-up, Jeremy Hunt’s budget was digested significantly more favourably than that of the Truss-Kwarteng “era” (if you can call it that). Hunt implemented some widely-expected tax hikes in various areas, whilst cutting back on Government spending. The current energy price guarantee is extended, but made less favourable beyond April 2023. If inflation has not dropped significantly by then, it could well impact figures further.

As mentioned, GBP had a relatively positive week overall last week, hitting August highs against the Dollar and a two-week best against the Euro. There is certainly potential for upward movement for GBP versus a fairly lacklustre Euro over the coming weeks, despite all the economic uncertainty on both sides of the channel. If you have any upcoming requirements on the pair, then please do reach out to the team for support.

Sterling moves versus the Euro last week can be seen in the chart below:


On the continent, Eurozone numbers continue to potter along without masses of excitement frankly. Eurozone Final CPI was confirmed as 10.6% (annualised), whilst GBP for October should show a growth of 0.2%. ECB President Christine Lagarde maintains that "the risk of recession in the bloc has increased", and even that is unlikely to bring down inflation significantly. As with the Bank of England, Frankfurt are aware their only real tool to combat inflation is interest rates, despite those recessionary risks.

In the US, having (likely) turned the corner on inflation recently, all eyes now shift to the upcoming Fed meeting on 14th December for their policy stance. Expectations were for the Fed’s pivot point to be significantly further away than this meeting, but will the Fed look to take quick and decisive action on monetary policy this early? They will be fortunate enough to have another round of data from November to browse before making their decision.

US Retail Sales numbers for October seem to be showing favourable growth, with Americans clearly not put off spending by the current higher interest rates. That said, this is the first month with growth of over 1% since February, but any growth is growth in the current climate. Federal Reserve member James Bullard said in a speech last week that the Fed need to continue to press on with rate hikes now, so they have less to do in Q1 of 2023. Expectations are currently for a 50 basis point hike in mid-December, but as mentioned the next round of data will influence that heavily. Watch this space…

After a very momentary blip above 1.20 last Tuesday, GBP-USD has settled into the 1.18 to 1.19 bracket since. A change in policy stance from the Fed and we could quite easily poke back above 1.20 with potential for higher. As always though, it all depends on the data. Moves last week on GBP-USD can be seen in the chart below:


The week ahead:

Tuesday – Reserve Bank of Australia Governor Lowe speech (07:00 UK time) Canadian Retail Sales (13:30)

Wednesday – Reserve Bank of New Zealand interest announcement (exp. 4.25%), Manufacturing & Services PMI data UK/Eurozone/US (08:15 to 14:45), Fed Meeting Minutes (19:00)

Thursday – Bank of England Chief Economist Member Huw Pill speech (11:00), US BANK HOLIDAY – THANKSGIVING.

So a shorter week this week with US markets closed on Thursday for Thanksgiving. Worth noting that no USD payments will move on Thursday as a result, so please act accordingly in relation to this. Trading volumes in the markets will also be lower, so events such as Huw Pill’s speech on Thursday morning in the UK may well have more market impact than usual.

Outside of Thursday we are relatively thin on the ground in terms of events. Wednesday provides a raft of economic data from the UK, Europe and US in terms of Manufacturing and Services sector data for November thus far. The run up to Christmas could prove crucial for these sectors, especially in the UK & Europe.

So less data, but often those are the most volatile weeks. Oh and there is the small matter of that World Cup thing happening too apparently…..

Do reach out to the Aston team if you have any upcoming requirements. With movements of 7% plus already this month on GBP-USD, there has never been a more important time to be in touch with us, to make sure you are on the right side of these swings.

Have a great week.