ACM Update 24-10-22

Written by: David Comber
Date posted: 24-10-22
Larry - 10 Downing Street

The revolving door of 10 Downing Street is back in full swing, just six weeks after the last change of tenant. In her latest (and final) U-turn, Liz Truss stepped down as Prime Minister after a week full of speculation and almost comical events. Her departure was generally viewed as Sterling-positive by markets.

In the US, speculation as to the path of the Federal Reserve’s ongoing monetary policy, saw a softer Dollar to close out the week. This week, Larry the cat should get his new housemate at Number 10, and we hear from the ECB as to how their monetary policy is to be adjusted.

UK politics remained in the headlines last week, in what continues to be frankly an embarrassing couple of months. After suggestions of “bullying” during votes in the Commons and further U-turns in her policies, Liz Truss was essentially forced from her post, after 44 days in charge. The same Conservative party who voted for her just six weeks ago, became firmly against her and sought change.

In a rapid series of events over the weekend, we have gone from three potential candidates for Prime Minister down to two. Rishi Sunak and Penny Mordaunt remain, after Boris Johnson stepped out of the race late on Sunday. Sunak and Mordaunt need to seek the backing of at least 100 Conservative MPs each by 14:00 today, to remain in the contest.

By close of business, we could quite easily have ourselves a new Prime Minister, with Sunak currently looking favourite for the role. Penny Mordaunt is still struggling to reach the required number of backers. As of yet, financial markets don’t seem to have leant one way or the other regarding the candidates. Jeremy Hunt seems to be providing the stability required of a Chancellor (in the eyes of the markets) at present, so GBP direction may wait until after the PM announcement and the top roles are finalised.

Sterling itself had a volatile few days, with movement against the Euro of some 2.5% during the week. Inflation data released on Wednesday morning showed the UK’s headline figure is back to 10.1% (year-on-year), matching the August high. It seems peak inflation hasn’t arrived yet on our shores. Equally, with these figures the ones used for the benchmarking of benefit and pension increases, a cynic might say September’s numbers are often tinkered a fraction lower each year. A big rise next month?

Unsurprisingly after the turbulent September in the UK, Retail Sales figures for the month showed a -1.4% drop month-on-month. The extra bank holiday for the funeral of the Queen, energy price rises and the turbulent scenes in the mortgage market are likely to have calmed consumer spending. The figure followed a -1.6% drop the previous month.

The overall movements for the week on GBP-Euro can be seen in the chart below:


Despite insistence from Christine Lagarde that the Eurozone isn’t in a recession, the bloc continues to look precarious. Data released last week showed the Final annual inflation figure for September as 9.9% for the bloc as a whole. The Baltic area is currently accelerating the fastest and demonstrates a sizeable East-West divide in the figures.

This week we get to hear how the ECB will be adjusting their monetary policy to try and combat ongoing inflation concerns. It is difficult to see anything other than a further 75 basis point hike from Lagarde & co this Thursday lunchtime. This will likely be followed by at least another half per cent at the December meeting, however these numbers are largely already priced into markets.

Over in the US, the Dollar saw considerable volatility on Friday. GBP-USD saw movements of circa 2.5% in the space of six hours, as comments from Federal Reserve members sparked speculation as to the interest rate path in the US. Their next meeting takes place next week (2nd Nov), with discussion surrounding when and how to slow down rate hikes becoming almost as important as the immediate policy announcement. The so-called “pivot point” will dictate when the Fed go from hikes to cuts, in order to stave off a recession. Current expectations are for this to be in late 2023, but things could move quickly.

Movements last week, including the sizeable shift on Friday afternoon can be seen in the chart below:


Elsewhere, we had more intervention from Japan in the FX markets to shore up their currency. Or as I prefer to call it, "Yen behaving badly"... The JPY, broke through 150 versus the Dollar for the first time since 1990, forcing the hand of the Japanese to sell Dollars and buy Yen in order stabilise its own currency. A similar intervention happened a few weeks ago though, but the trend still continued afterwards.

In Australia, the Reserve Bank of Australia’s latest minutes continued to show a finely poised economic picture. Further interest rate hikes will be needed, however striking a balance between rate hikes and maintaining economic growth (as elsewhere), remains a focus.

The week ahead:

Monday – Manufacturing & Services Data UK/Eurozone/US (08:15 to 14:45 UK time)

Tuesday – German IFO Business Climate Data (09:00)

Wednesday – Bank of Canada Interest Rate announcement (exp. 3.75%, 15:00)

Thursday – ECB Interest Rate announcement (exp. 2.00%, 13:15), ECB Press Conference (13:45)

Friday – Bank of Japan Interest Rate announcement (exp. -0.1%, timing tentative)

So a much quieter week ahead in terms of market data, with all eyes on the ECB on Thursday for the biggest market data release. The policy move of an extra 75 basis points seems a foregone conclusion, but the narrative regarding ongoing policy will be key to Euro movements this week.

In the UK, the race to Number 10 will dominate headlines. At the moment, this seems to be going in the direction of Rishi Sunak, but the last couple of months have shown that absolutely anything can happen in Westminster! We may well see some GBP positivity this week if we see a quick resolution. This would give sterling some much-needed stability in the short-term.

In the US, any narrative regarding next week’s Fed meeting will be a driving factor.

If you have any pending requirements across the board, do reach out to the team and we will discuss the most appropriate strategy.

Have a great week.