The pound has had a fairly steady week, with most sterling crosses (bar cable) being constrained within recent ranges, as a distinct lack of clear UK drivers ensured that it took its cues from the other side of the pair in most cases. On the data front, the latest report from the Nationwide Building Society confirmed that UK house prices are now falling at their fastest pace since the early days of the pandemic. Prices fell a nasty 1.4% over the past month, following a 0.9% drop previously. This has helped to ensure that annual price growth has now slipped to a mere 4.4%, a figure down from 7.2% previously. In both cases, the data was well under analyst estimates.
It is clear to see that the combined impact of higher interest rates and a slowing economy is having a marked impact on UK property market, with the latest mortgage approvals also falling to their lowest level since the middle of 2020. Further declines in UK house prices are expected over the coming months, despite the recent slight decline in longer-term borrowing costs, which may help to attract a slight increase in activity, even if only at the margin. The Halifax will also be releasing their take on current UK house prices next week.
Back to the pound, and GBP/USD has just broken over a recent cycle high, despite the widespread negative outlook on the UK economy, which clearly illustrates to us that the dollar side of the pair (see USD) is by far the biggest driver. At the time of writing, GBP/USD is attempting to push beyond 1.2300, which if broken, would take our proud pound to levels not seen since the summer. GBP/EUR is also grinding higher, albeit at a more leisurely pace, with a break over 1.1700 key to unlocking further gains for the pound. Impressive moves indeed.
The latest inflation report reflected some much-needed softening in the Euro area, with the first notable declines in the data for some 17 months, as the cost of wholesale energy prices declined, and supply-chain bottlenecks eased. Both Germany and Spain had started the trend of softening inflation earlier in the week, before the key Euro area inflation dipped to 10% from 10.6%. Whilst inflation may still be at 10%, the mere fact that inflation has eased somewhat, will give some comfort to the ECB, who have been battling surging inflation with some chunky 75bps rate hikes of late.
On that note, the softer inflation reading also injected some serious doubts into what size of rate hike the ECB will lean toward this month. ECB President Christine Lagarde has said just this week that she did not think that inflation had peaked in the region, but to be fair to her, that was before she had access to the latest data. Whilst some members of the ECB – such as Robert Holzmann still favour a 75bps hike, markets have drifted towards favouring a smaller 50bps move, which is understandable given the softer inflation backdrop.
The recent trend of better data in Germany came to an abrupt halt on Thursday, with Retail Sales declining 2.8% over the past month, as high inflation helped to ensure that shoppers held back, and reflecting the beginning of what might be a weak winter of activity.
As for the Euro, well EUR/USD has clearly accelerated away from the key parity region, and is currently attempting to maintain a break over previous key resistance at 1.0500, driven largely by that weakening dollar, with the single currency looking particularly well-supported at present. Next week sees the release of the regional Retail Sales and growth (GDP) data, with both likely to impact the short-term profile for the single currency.
Markets have been on high alert for much of this week in anticipation of the latest payrolls data, as well as Fed Chair Powell’s latest rumblings at an even hosted in New York. Whilst we will have to wait until later today (Friday) for those payrolls, Powell’s comments certainly rocked markets on Wednesday evening. He went as close as to say that the Fed would be hiking rates at a smaller pace (probably 50bps) as soon as this month’s meeting, without explicitly saying it. His ‘time to moderate the pace of rate hikes may come as soon as the December meeting’ comment was what the markets wanted to hear, even if he balanced the comments with confirmation that the much-debated terminal rate may end up being higher than had previously been expected, and that the Fed have a commitment to ‘stay the course’ on tackling inflation. Markets just listen to the bits that they wanted to hear, as ever.
The subsequent reaction from markets was quite something to behold, with the Nasdaq rallying nearly 4.5% on the day, as risk assets embraced the prospect of a slower pace from the Fed. Against that backdrop, the dollar index understandably disintegrated towards the recent cycle low just below 105.00, and now looks vulnerable to further declines. However, incoming data will still determine the direction of travel for the greenback in the longer-run. On that note, the latest ADP (private payrolls) could be an indication that the more significant NFP report might show some tentative signs of weakening amongst the frothy US labor market, given that there were only 127k new job gains throughout November, against an expected increase of 127K. The key JOLTS data also reflected that job vacancies are diminishing, even if the pace of decline is somewhat slower than had been anticipated. Given the much-publicised redundancies amongst tech firms recently, with over 50k jobs lost over the past month alone in the sector, it is probable those losses will start to filter through and impact the headline.
Outside of the Labor market, it has been more of a mixed bag amongst US data, with the latest growth figures beating estimates, reflecting a 2.9% GDP gain over the past quarter, versus an estimated increase of around 2.6%. However, the initial print is always subject to a degree of amendment. After the surprise beat on New Home Sales last week, the recent trend of weakness in the US housing market continued, as Pending Home Sales slipped an eye-watering 37% (YoY). Those Fed rate hikes are certainly having a negative impact on the housing market as prices fall, mortgage approvals decline and overall activity diminishes.
Beyond today, next week is fairly quiet for US data, with PPI, ISM Services, and mostly less significant bits and bobs due for release. As for the greenback, whilst there remains key data in the shape of today’s NFP as well as the key CPI ahead of the FOMC meeting, only a big jump in the headline for both is likely to sway the Fed, and therefore the barrier to a strengthening dollar is becoming a much harder one to reach at the moment.
In a recent poll conducted by the good people at Reuters, the Bank of Canada (BoC) are set to hike Canadian rates by another 50bps, at their forthcoming meeting next week. Saying that, it is a fairly tight call, with 16 out of 30 economists favouring 50bps, with the remaining 14 expecting the BoC to hike by 25bps. The latest growth figures out of Canada, which were released earlier in the week, were a bit of a mixed bag, rising by 0.7% (QoQ/Q3) against estimates of 0.4%, whilst the Annualized figure missed, rising by 2.9%, versus 3.5% expected. That mixed growth outlook has helped cloudy the picture, given that inflation still remains way over the BoC’s target, although that is obviously the case just about everywhere.
Ahead of the BoC will be today’s key employment data for November, with a much smaller 5k expected on the headline, after last month’s impressive 108k gains. The overall unemployment rate is also expected to edge higher from 5.2 to 5.3%.
The Loonie has taken its cues this week from both the volatile moves in the price of oil, as well as the broader greenback decline. Oil has been interesting, even if only to watch, given that markets initially struggled to price the impact on demand from the increase of protests in China from the ongoing pandemic lockdowns. However, after moving back above 1.3600 for a spell, USD/CAD dropped back to just below 1.3400 in conjunction with rallies for most major currencies against the greenback toward the end of the week.
AUD & NZD
Next week’s RBA meeting is expected to conclude with the RBA raising Australian interest rates by another 25bps, after last month’s move of a similar magnitude. Although the RBA said in their minutes of that meeting that they could return to larger rate hikes (or even take a cheeky pause), with inflation set to soften and signs of emerging weakness in the economy, such as the recent drop in Retail Sales, on balance the most likely outcome remains that of a 25bps move.
The day after the RBA will see the release of the latest growth figures for Australia, with a consensus increase of 0.7% through Q3, after a slightly larger 0.9% jump previously. As for the Aussie, well AUD/USD continues to mark steady gains higher, after bottoming-out at just under 0.6200 at the beginning of October. The top at 0.6840 this week marked the highest level for the Aussie since September, and that high looks vulnerable for further attempts at the topside.
The kiwi has been just as strong, with NZD/USD mirroring the gains of AUD/USD and surging recently towards key resistance at just over 0.6460. With a light agenda ahead next week in New Zealand, the kiwi is likely to take its inspiration from the Aussie and greenback moves for the most part.