ACM Update 22-04-24
The latest UK CPI inflation numbers, combined with opinions from a couple of Bank of England members, were enough to knock sterling downwards last week. The Bank’s nine-strong Monetary Policy Committee seem to be nudging towards an interest rate cut in the June meeting. The May meeting for now seems likely to just be the warm-up act.
Elsewhere, US interest rates remaining where they are seems highly likely, perhaps until the back part of the year. Is this likely to drive GBP-USD lower still?
We saw plenty of risk aversion in FX markets last week, as concerns mounted about conflict in the Middle East. Oil prices were volatile as a result. Many safe-haven currencies such as the US Dollar, Swiss Franc and Japanese Yen moved positively on Friday morning. Oil prices seem to have calmed somewhat since though.
Plenty of UK news last week, the biggest data release being UK inflation dropping back down to 3.2% in March from 3.4% in February. The shift was mainly driven by slowing food price rises and marked the lowest UK inflation figure in two and a half years.
The fall in inflation was something Rishi Sunak was very proud to shout about in prime minister’s question time, despite (broadly) this being due to action from the Bank of England. Chancellor Jeremy Hunt also suggested that the falling cost of living would “lift the mood of voters”.
Wednesday afternoon saw a speech from Bank of England Governor, Andrew Bailey, who said he “expects next month’s inflation reading to show a sharp drop”. This ironically led to a sharp drop in GBP, as markets interpreted Bailey’s comments as inflation getting to a position which would necessitate a rate cut.
Amidst a rapidly changing picture, it now seems the Bank of England may be just behind the European Central Bank in cutting rates. The ECB meet next on 9th June, whilst the Bank of England gather on 9th May & 20th June. The latter looks a good possibility for a rate cut from Bailey and Co, if data continues on the current path.
The jobs market meanwhile isn’t as rosy. The unemployment rate jumped back up to 4.2% in the latest figures, the highest for six months. Retail sales also saw no gain at all from February to March. These are two other factors which could help persuade a rate cut sooner rather than later.
Late on Friday, the Bank of England’s Deputy Governor, Dave Ramsden, knocked half a per cent off GBP, with his comments that “inflation pressures are receding” in the UK. The committee seem to be edging their language towards a cut.
In a common theme recently, very little data out of the Eurozone last week. Industrial production figures for February grew by 0.8%, after a big drop the month before. The Eurozone’s ZEW Economic Sentiment figure recorded its most optimistic outlook for the bloc, since February 2022, at 43.9.
We also had speeches from ECB Governor Lagarde and her Deputy, Luis de Guindos. The latter suggested that if data continues to evolve as it has been recently, then the ECB will be “ready to reduce the restrictions on our monetary stance”.
A flatter week then for the Euro versus the Dollar, despite hitting lows last seen in early November. However, a sharp drop for Sterling-Euro following the Dave Ramsden comments mentioned above, taking us down to a low dating back to 5th January.
The moves for the week on GBP-Euro can be seen in the chart below:
On the Dollar front, a flatter week when compared to the one before. USD saw some positivity off the back of comments from Fed Chairman Jerome Powell, who implied the committee will wait longer than had previously been suggested to cut interest rates, given recent inflation readings.
Powell’s colleague Loretta Mester sang a similar tune, commenting that more information was needed, and there is no hurry to cut interest rates. Press conferences from other policymakers such as Raphael Bostic and John Williams, all suggested caution as to when to expect cuts. Bostic suggested that the Fed could even hold rates all year if sticky inflation persists. Whereas John Williams said a further hike was even possible if needed to help hit the inflation goal.
The overriding picture is that US interest rates seem likely to remain high for some time, which is supporting the US Dollar and any other currencies pegged to the USD (AED, QAR, SAR, HKD).
Movements on GBP-USD last week can be seen in the chart below:
The week ahead:
Monday – CBI Industrial Order Expectations (11:00 UK time), ECB Lagarde speech (16:30)
Tuesday – FRA/GER/EU/UK Manufacturing & Services PMI (08:15-09:30), MPC Haskel speech (09:00), MPC Pill speech (12:15), US Manufacturing & Services PMI (14:45)
Wednesday – Australian CPI inflation (02:30), Bank of Canada minutes (18:30)
Thursday – Australia & NZ Bank Holiday (Anzac Day), US Advance GDP & Unemployment Claims (13:30)
Friday – Bank of Japan rate announcement (04:00), Spanish Unemployment Rate (08:00), US Core PCE Price Index (13:30), Revised UoM Consumer Sentiment (15:00)
For now it seems that we have somewhat of an “Atlantic divide” regarding inflation and interest rates. The US seems to be in a comfortable position, where employment and growth are looking positive. This should not necessitate an interest rate cut any time soon. In the UK and Eurozone, inflation is coming down, whilst growth remains sluggish which could force the respective central banks into their policy changes sooner rather than later.
For sterling the after-effects of Friday afternoon’s Dave Ramsden speech were still being felt in Asian trading this morning. Markets will remain driven by interest prospects for the foreseeable one would expect.
This week is slightly thinner in terms of data releases, but the raft of Manufacturing & Services PMI figures on Tuesday are also likely to create movement. We also have a speech from MPC member Jonathan Haskel wedged in between. If he leans towards rate cuts in June, that would be three out of nine committee members, and thus edging towards a majority.
For those needing to buy GBP, the last few days have presented a good opportunity, so reach out to the team for more information.
Have a great week.
