ACM Update 25-09-23
Ten interest rate hikes in a row from the Bank of England came to an end, as a surprise drop in UK inflation led policymakers to opt for a pause. Sterling remains under pressure, with little by the way of UK data releases to support it as we enter a new week.
We have also now seen ten weeks in a row that the Dollar has gained versus the Euro. Hopefully not an omen for Ryder Cup week…..
A pretty dire week for the pound, with multi-month lows versus a lot of other major currencies. On a positive note, inflation is coming back down having hit 6.7%, versus a forecast bounce up to 7.0%. Core inflation also fell to 6.2%. The main factors behind the drop were restaurant and hotel costs falling, along with food and non-alcoholic drinks, plus a timely August drop in the price of air fares.
Coming just 24 hours before the Bank of England rate announcement, this put the MPC members in a quandary leading to a split vote as to whether to hike or hold. The usual suspects voted for the hike, whilst Andrew Bailey & Chief Economist Huw Pill voted to hold rates this time, with the former’s casting vote swaying the 5-4 in favour of a hold. The run of ten hikes in a row dating back to December 2021, thus comes to an end .
GBP lost ground in the run-up and even more afterwards, with the pound now less attractive as an investment tool, given that (seemingly) the rate hike cycle may be coming to an end.
Other UK data came on Friday morning in the shape of retail sales. This was positive again (after a negative blip last month blamed on the damp July weather) at 0.4%, a shade under the 0.5% forecast. The PMI data for manufacturing and services showed both in contraction but, with the former over expectation, and the latter a good chunk under.
Last week’s movements for sterling versus the US Dollar can be seen in the chart below:
The Federal Reserve also had their latest rate announcement with Powell & colleagues opting to hold/pause again for now. Jerome Powell was clear that they were “close to done” raising rates. Comments from fellow committee members though reaffirmed that rates will remain higher for longer, which was a big support to the Dollar later in the week. As mentioned, GBP-USD hit lows not seen since the end of March.
US weekly unemployment claims came in well short of the expected number, their lowest since March also. The respective manufacturing and services PMI’s meanwhile were both around the 50 level. The Dollar motors on, now ten weeks in a row of gains versus the Euro.
Pretty quiet on the Eurozone front to be honest. Consumer confidence figures released showed a pretty dire situation getting worse, proven by German PPI (m/m) coming in worse than expected for August, back “inflating” again at 0.3%.
Equally, the majority of European PMI numbers were pretty awful, with German manufacturing the standout at 39.8. As a reminder, anything sub-50 is equivalent to a contracting sector. A sign of how weak the pound is currently, that even the above poor data was enough for EUR to make ground against sterling.
Last week’s moves for GBP-Euro can be seen in the chart below:
Elsewhere:
The Australian Monetary Policy Committee minutes showed the Reserve Bank of Australia considered a September hike but wanted more time to assess the impact of their recent rate hikes.
The Swiss National Bank held rates, against expectation. This brought their run of five consecutive hikes to an end.
Canadian inflation bounced back up to 4% from 3.3%, led by higher fuel prices. The Reserve Band of Canada may be forced into another hike at their next meeting.
Sweden’s Riksbank hiked rates to 4.00% and signalled there could be more to come.
Norges Bank hiked to 4.25% but surprised markets by suggesting another hike in December was likely.
The Bank of Japan maintained their policy stance in their latest meeting, sending the Yen downwards once again.
This week:
Monday – German IFO Business climate (09:00 UK time), Christine Lagarde speech (14:00)
Tuesday – US Consumer Confidence (15:00)
Wednesday – Australian Inflation (02:30)
Thursday – Spanish CPI (08:00), ECB Economic Bulletin (09:00), US Final GDP & Unemployment (13:30)
Friday – German Retail Sales & Import prices (07:00), Lagarde speech (08:40), UK Mortgage Approvals (09:30)
With the next central bank meetings now six weeks away, the focus returns to economic fundamental data once again for clues as to the next policy changes. A pause seems likely at present from the big three in their next respective meetings; ECB 26th October, Federal Reserve 1st November and Bank of England 2nd November.
For now, those selling Dollars or Euros into GBP can make hay whilst the sun shines frankly with current multi-month lows. Make sure to get in touch with the team if you are on this side of the coin. Dollar strength is there across the board at present and this looks to remain for as long as the post-COVID recovery in the US continues at pace.
Have a great week.
