09 December 2022

GBP

UK data-lovers have been surviving on scraps, with a fairly light agenda over the week. Perhaps the most telling release came in the shape of the latest House Price survey from the Halifax. Following on from a weak print from the Nationwide just last week, the Halifax confirmed that UK house prices declined by 2.3% throughout November, which represented the sharpest drop in prices for some 14 years. Declines can perhaps be expected, given the sharp interest rate increases leading to a lack of new mortgage applications, itself fuelled by big increases to the cost-of-living, and economic uncertainty. Given the big rises in prices over such a long time, it is also perhaps not surprising that some consolidation is to be expected, a move which could help those who were previously unable to purchase property, a welcome opportunity. That will certainly be helped if long-term rates continue their recent correction.

The pound has remained remarkably resilient of late, with GBP/USD continuing to trend higher, reaching a top approaching 1.2350, a move which has been helped by a much weaker dollar. GBP/EUR has also moved back over 1.1600 through the latter part of the week, after previously declining from a recent high at 1.1700.

Next week could not be more different than this week has been, with a plethora of key UK data releases due, including the latest inflation, employment and the next Bank of England meeting. Inflation comes before the BoE, and having reached 11.1% (YoY), expectations are for a further increase to around 11.5%. If the data matches expectations, then the current market-implied expectations for another 50bps rate hike from the BoE will be cemented. That would see UK rates reach 3.5%, despite the economy now falling into a recession, and a particularly difficult-looking winter ahead for a UK consumer that is already betting huge increases to their cost-of-living.

Thoughts from the dealing desk

-Daniel Jones, Corporate FX Dealer

EUR

Having raised Euro-area interest rates by 200bps since July, the ECB are now getting very close to reaching their neutral level, according to the ECB’s Herodotou. Next week’s ECB meeting is therefore expected to conclude with a slightly smaller 50bps move, after two successive meeting of 75bps hikes. The case for a shallower hike increased after the latest inflation data for the region decreased to 10% (YoY) from 10.6% previously. Markets have since settled on a 50bps move, although there have been some mixed messages from ECB officials of late, with ECB President Lagarde unwilling to commit in recent speeches, so a larger hike cannot be completely dismissed at this stage.

Recent data has been better, certainly in Germany, where factory orders and Industrial Output have surprised to the upside. The latest growth data for the region also (just about) beat expectations, rising by 0.3% (QoQ/Q3) and marking a yearly gain of 2.3%.

As for the single currency, well EUR/USD has been capped at 1.0600, which needs to be broken to open-up further upside potential for the single currency. Saying that, the recent trend higher after breaking back over parity remains on track. Looking at the busy schedule next week, the Fed are likely to dominate proceedings, and so for this rally to continue, it will probably take a smaller hike from the Fed (see USD).

USD

The latest US data over the past week has generally been much better than expected. Following on from that healthy payroll report last Friday, this week has seen a much better than expected ISM Services PMI, which reflected further evidence of underlying momentum in the US economy. Non-Manufacturing PMI increased by 56.5, from 54.4 previously. Markets had been anticipating a decline to around 53.3. Factory Orders also increased by 1% (MoM/Oct).

With payrolls, consumer confidence and other key data remaining stubbornly resilient, the case for the Fed to hike by a smaller margin next week has been considerably diminished. This has been reflected by the weak performance of risk assets throughout the past week, with US indexes falling each day since Monday. Although several key fed members including Jay Powell  (before the quiet period) had suggested that the time may be coming for a slowdown based on the cumulative rate hikes so far, the slowdown has always been based on the data doing its part, and the ongoing strength has frustrated the bulls amongst us.

Saying that, the next CPI report might still have a say on matters, given that it is released a day before the FOMC meeting next Tuesday. However, the latest estimates point toward a 0.6% (MoM) gain – up from 0.3% last month, taking the yearly increase up to 6.4% for the key core component. If the estimates are correct, then that will make the Fed’s case for slowing rate hikes even harder come next Wednesday.

Given all that, you might have expected the dollar to have been on fire over the past week, but that has not really been the case, with the dollar index (DXY) slipping back below 104.50, having failed to sustain a move back over 105.00 earlier in the week. However next week is a different story, and the dollar is far more likely to play to a much more familiar narrative, and will probably rally on better data (as risk assets stutter) and struggle if inflation is softer and the Fed ultimately deliver a smaller hike after all. Funnily enough, once the dust has settled after all that combined data and central bank moves, markets will start to revert to holiday mode.

CAD

The Bank of Canada hiked Canadian rates by another 50bps earlier this week, marking their seventh hike since March and raising the official cash rate up to 4.25% in the process. Whilst the move was not entirely unexpected, overall analyst expectations were leaning toward a 25bps move, however, with annual inflation running at just under 7%, the BoC felt it necessary to go for a bolder move on the day. The big news from the BoC came in the scope of forward guidance, with an immediate removal of the line suggesting that the BoC ‘expects’ to raise rates further down the road. It therefore appears that the BoC have now adopted a more neutral stance, preferring to assess incoming data before deciding on any future rate moves, with a likely pause in proceedings in the early part of next year.

Markets are not entirely convinced on that outcome at the moment, with market-implied expectations for another 25bps hike from the BoC still running at about 70% probability, although that metric will probably move around depending on how the data looks, and remains fairly fluid.

The Loonie has had a particularly active week, with USD/CAD trading within a 1.3385 – 1.3700 range (as of Thursday afternoon). However, the BoC action was not the primary driver, with a powerful combination of broader greenback strength (see USD), and a new cycle low in the price of oil, responsible for most of the rally from 1.3400 – 1.3700. Looking ahead, BoC Governor Macklem will be giving a speech on Monday evening, which is likely to be closely monitored by markets.

AUD & NZD

As expected, the RBA raised rates in Australia by 0.25% earlier in the week, taking the official cash rate (OCR) to 3.1% in the process. That marked the eighth rate increase by the RBA in as many months, as the RBA continues with its battle against rising inflation in Australia. ‘Inflation is too high, at 6.9% (YoY)’ said RBA Governor Lowe in the RBA’s accompanying statement.

The RBA also said that they expect rates further over the period ahead, but they are not on a pre-set course. ‘The size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the Labour market.’

AUD/USD has had a fairly sideways week, initially slipping below 0.6670, having failed to sustain a move over 0.6800 on Monday, however, the pair bounced back strongly by yesterday (Thursday) afternoon, and was once again pushing to break over 0.6780. it was a similar story for the NZD/USD, which slipped back from over 0.6400 to around 0.6300, before bouncing back over 0.6350.