ACM Update 23-09-24
Another buoyant week for GBP saw the Pound hit a two-year high versus the Euro, and a high dating back to March 2022 versus the Dollar. The significant contributors to this were a fifty basis point rate cut from the Federal Reserve to begin their loosening cycle, and an 8-1 vote to hold policy from the Bank of England.
This week initially sees the latest round of PMI figures, then speeches from significant policymakers will be the main focal point. All this as we move towards the end of Q3 2024.
As mentioned, the Pound was the biggest beneficiary last week as it continues to be the strongest performing major currency of 2024. Interest rates remaining high in the UK, with the likelihood of this being the case for some time, has provided additional support of late.
Whilst inflation in the UK has been coming down in recent months, as pointed out by Bank of England Chief Andrew Bailey we aren’t yet at the 2% target. The latest figures from the ONS (Office for National Statistics) were released last Wednesday and displayed the metric at 2.2% in August, mirroring the July figure. This, as well as the Core CPI inflation figure of 3.6% were both in line with market expectations.
One sizeable increase in the inflation stats was the cost of air fares in August (up 22% in a month), however these were offset by lower fuel prices, as well as hotels and restaurants. Overall, there was still concern in the Services sector though, where inflation rose by 5.6% versus 5.5% forecast. Such a figure increased the likelihood of the Bank of England holding interest rates in their meeting the following day.
As it transpired, this was indeed the case with Bailey & Co opting to leave UK interest rates unchanged at 5.00% on Thursday lunchtime. With last month’s knife-edge 5-4 vote to cut a distant memory, this time around was a much clearer 8-1 decision to hold. Markets had predicted a 7-2 split, thus the Pound was given further support from the news.
Bailey referenced concerns about services inflation, whilst vowing a gradual approach to easing was the current intention. The November meeting may thus produce the same outcome as this one, depending on data in the interim.
In other UK news, the Pound may be strong but consumer confidence seems to be anything but. The metric to measure public confidence in their finances and the economy, dropped by the most in two and a half years in September. Much of this is attributed to the gloom-mongering from the new Government ahead of their Budget on 30th October. With another five weeks until that Budget, economic performance may lag behind expectations in the run-up, as consumers nervously await news. The UK Chancellor Rachel Reeves speaks today at the Labour Party Conference.
For August at least, UK Retail Sales figures performed better than expected with a monthly growth of 1.0%. Will this remain as buoyant for September and October though? To close out the week, the Bank of England’s arch-hawk, Catherine Mann, reiterated previous comments about interest rates needing to remain high until the 2% inflation target is achieved “sustainably in the medium term”.
As mentioned, another strong week for sterling as it hit prices last seen two and a half years ago versus the US Dollar. Recent movements can be seen in the chart below:
The bigger policy announcement last week came from Washington, where the Federal Reserve began their (long-awaited) cutting cycle on interest rates. Since the Jackson Hole Symposium last month, the question has not been if, but more how large would the pending cut be. The answer on Wednesday evening was a “strong” move, at fifty basis points.
Despite an economy that is still performing well overall and inflation not yet at their 2% mandate, the Federal Reserve have had one eye on the US employment sector for some time. As previously reported, the July jobs data showed the first real signs of a slowdown in US employment, further backed up by the August numbers. The move caused the Dollar to weaken throughout Wednesday, but it wasn’t all one-way traffic.
In the following press conference delivered by Jerome Powell, there were reasons for Dollar support. The Fed Chairman warned markets not to expect such sizeable rate cuts as the new norm from the committee. He also reassured that growth and inflation forecasts still point towards a soft-landing for the US economy as the likely outcome, adding he didn’t see a recession risk on the horizon.
It wasn’t a unanimous consensus however. One Fed policymaker, Michelle Bowman, voted against the eventual 0.50% cut in interest rates, marking the first dissent of this kind since 2005. Everyone’s favourite Presidential hopeful Donald Trump meanwhile suggested the cut to be a “political move” and that he would have preferred a smaller reduction.
The rate cut also had a knock-on effect on commodities too. The price of gold moved higher as traders bet on more rate cuts from the US over the coming months, which is likely a fair suggestion. We currently expect cuts from the remaining two Fed meetings of 2024. Oil prices meanwhile remained stable as nervousness about weaker US demand is balancing out concerns about escalations in the Middle East.
In terms of other US data releases, Retail Sales for August offered little to be cheerful about, producing just a 0.1% monthly gain. Admittedly this was better than the contraction markets were expecting. Weekly Unemployment claims meanwhile have now swung back the other way, hitting their lowest in four months. Perhaps the sheer possibility of this week’s rate cut has already assisted hiring numbers.
Across the board though, it was a pretty bad week for the Dollar.
After their own policy meeting of the week before, European data releases were somewhat quieter. Inflation in the bloc is now on a par with the UK figures at 2.2%. With growth remaining a serious concern for the bloc as a whole, this may well give Christine Lagarde and her colleagues the green light to cut interest rates again at their next meeting (17th October).
Speaking of growth, the German Bundesbank released their latest report last week which painted a gloomy picture. It warned the economy could shrink again in Q3, as weak demand persists. Consumers remain cautious about spending, employment is stagnating and higher interest rates continue to pile pressure on business spending also. At the risk of sounding like a broken record, a tough period to come seemingly for the Eurozone’s biggest contributor.
EU-wide Consumer Confidence data released last week showed numbers remaining low for the metric too. This didn’t stop President Christine Lagarde praising the “remarkable” way that the ECB have been able to protect job losses whilst reducing inflation. She predicts EU inflation will hit the 2% target by 2025, “but many uncertainties still remain”.
It was more GBP strength than Euro weakness that pushed the pair upwards to a two-year high, but movements for the week can be seen in the chart below:
The week ahead:
Monday – FRA/GER/EU/UK/US Manufacturing & Services Flash PMIs (08:15-14:45 UK time), UK Chancellor Reeves speech (12:00), Fed Bostic speech (13:00), Fed Kashkari speech (18:00)
Tuesday – Reserve Bank of Australia rate announcement (05:30), Fed Bowman speech (14:00), US Conference Board Consumer Confidence (15:00) Bank of Canada Governor Macklem speech (18:10)
Wednesday – Australian CPI inflation (02:30), BoE Greene speech (09:00), Fed Kugler speech (21:00)
Thursday – Swiss National Bank rate announcement (08:30) & Press Conference (09:00), US Final GDP for Q2 (13:30), Fed Bowman speech (14:15), Fed Chair Powell speech (14:20), ECB President Lagarde speech (14:30)
Friday – Spanish Flash CPI inflation (08:00), US Core PCE inflation (13:30)
Now that we have seen the latest decisions from all three of the big central banks, we have a clearer picture of where markets are positioned. Sterling remains in the ascendancy, with the Bank of England seemingly confident in their policy of keeping interest rates high to fully squash inflation. This is keeping rates favourable for those selling GBP, but in due course may begin to impact exports longer term.
The UK Government will also need to produce a believable plan for economic growth though, whilst avoiding further doom and gloom headlines. Rachel Reeves’ speech at the Labour Party Conference on Monday lunchtime will be vital in this.
In the Eurozone and US, having seen cuts in interest rates it is clear that both central banks are comfortable on inflation and are looking to favour other performance indicators. In the Eurozone, there is a desperate requirement for economic growth, whilst in the US the employment sector is the focal point.
We start the last full week of Q3 with a flurry of Manufacturing & Services sector PMI numbers from Europe, the UK and the US. Beyond that, the main events are speeches from significant policymakers, which may provide clues towards monetary policy throughout the remainder of 2024.
Perhaps the most significant set of these will come on Thursday where we hear from Federal Reserve Chairman Jerome Powell, as well as his colleague Michelle Bowman. The latter is of more significance than usual given her breaking ranks in voting against the Fed’s jumbo rate cut last week. ECB President Christine Lagarde also speaks shortly after.
There are a couple of pieces of important Dollar data during the week. These start with US Final GDP on Thursday, expected to show an uptick of 2.9% growth from Q1 to Q2. Friday meanwhile delivers the Fed’s chosen inflation metric in the form of Core PCE inflation.
Are we in for another buoyant week of GBP activity? Monday will likely tell the story of this, given the raft of PMI releases and Chancellor Reeves’ speech in Liverpool. Meanwhile many will be hoping the Dollar can somehow arrest recent losses seen against sterling.
For any looming requirements, ensure to reach out to the Aston team. For now we have excellent buying opportunities for those buying Euros or Dollars, so get in touch with us to discuss in more detail.
Have a great week.
