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Will the BoE follow the ECB?
10 minute read27 October 2023
GBP
The latest figures released earlier this week indicate the UK labour market continues to moderate. Whilst overall unemployment improved marginally from 4.3% to 4.2% during the three months to August, the number of unemployed workers increased by 82,000 over the same period. The ONS has derived that figure using a new methodology, which now includes jobs data sourced from HMRC.
The latest (flash) UK PMIs were slightly more mixed. The key Services sector declined further from 49.3 to 49.2 over the past month, which could add weight to concerns about a potential recession in Q4. Whilst the feedthrough loop from PMIs to GDP growth isn’t always consistent, the overall weakness points towards sluggish growth. Combined with broadly weaker economic activity, this could suggest that the BoE may continue to hold UK interest rates at current levels at its meeting next week. Markets have also priced in a continued pause, keeping rates at 5.25%.
The one fly in the ointment for the BoE remains persistent UK inflation. After steadily moderating throughout this year, the latest inflation figures suggest a slowdown in the pace of declines. Furthermore, recent higher energy costs could also help to keep headline inflation elevated for longer.
The ongoing decline in GBP/USD has continued throughout this week, albeit at a slower pace, with the pound briefly slipping below 1.2100, recording a 0.5% drop overall.
EUR
After ten consecutive rate hikes, the ECB maintained the key Euro area interest rates at current levels at this week’s ECB meeting. The ECB has previously raised rates by a cumulative 4.5% since its first hike in July last year. During the ECB’s press conference, ECB President Christine Lagarde admitted that the economy was weak but highlighted price pressures remain strong. She also suggested that any talk of rate cuts was still premature. Despite those comments, market-implied expectations for around 70bps* of cuts by the ECB throughout the next year remained unchanged after the meeting.
*Source: Bloomberg. As of 26/10
Ahead of the ECB, there were a few brighter spots among incoming data, albeit from a low base. The latest German IFO business survey registered broad improvements across the board, just a day after a slight beat in the latest German Manufacturing PMI, and posting the first such jump for the survey in six months. Expectations rose from 83.1 to 84.7, having been predicted to have increased to 83.3.
The overall Business Climate also improved from 85.8 to 86.9 over the past month. In a nod to Christine Lagarde’s comments, the latest regional PMIs were more disappointing, with all three major components of the survey missing estimates and further deteriorating over the past month. In particular, the Composite slipped to 46.5 from 47.2.
The single currency has also experienced a volatile week, with EUR/USD initially rising to almost 1.0700 before gradually moderating. By the European close yesterday, the pair had declined to below 1.0540 and had slipped by 0.7% in total over the course of the week. GBP/EUR also moved slightly higher and is close to recapturing the 1.1500 region, highlighting the pound’s slight dominance over the single currency.
Given the recent economic headwinds, the latest German and Regional growth data is expected to dominate incoming data next week, with preliminary Q3 GDP on Monday of particular interest. It has been another busy week in the US. The announcement that Mike Johnson had been elected as the Republican speaker of the House of Representatives has calmed market nerves and raised hopes that the US may still be able to avoid a potential government shutdown, at the same time increasing the possibility that aid packages will be approved for Ukraine and Israel. Incoming US economic data continues to exceed analyst estimates. The latest PMI surveys highlighted the broadening division between the US and much of the developed world’s economic output, with both services and manufacturing now above the key 50 threshold. That level is significant, as it is considered expansionary for an economy. Services rose from 50.1 to 50.9 on a preliminary basis during October, with manufacturing rising from 49.8 to 50. Despite the 30-year fixed mortgage rates rising to over 8% recently, there was also some good news on the housing front, with New Home Sales increasing by 12.3% during September. Perhaps the most significant news came among the latest growth data, with GDP increasing by 4.9% during Q3 on a preliminary basis, having been expected to have risen by 4.2% over the period. Whilst revisions to preliminary growth data are common, it is unlikely that any revisions will see a material decline to the initial figure. The latest Durable Goods orders also increased by 4.7% during September, and whilst these numbers are often highly volatile and distorted by the impact of aircraft orders (Boeing), they further demonstrate the ongoing robustness of the US economy. Perhaps the only slight blot on the landscape could be in the labor market, with both initial jobless claims and the 4-week average rising above expectations. With stronger economic data further reducing the probability of any imminent Fed rate cuts, broader market risk sentiment has remained constrained throughout the week, a backdrop that continues to benefit the dollar. The dollar index (DXY) has risen back over 106.50, having witnessed a rare decline previously. The rise in USD/JPY has been a factor, with the pair finally moving above 150.00 despite fears of imminent BoJ intervention. Today’s Core Personal Consumption Expenditure (PCE) Price Index is expected to highlight further moderation among US inflation and remains key to cementing market expectations for future Fed moves, much the same as next week’s October NFP employment report. As expected, the BoC maintained Canadian interest rates at 5% at the conclusion of its latest policy meeting on Wednesday. In his post-meeting conference, BoC governor Tiff Macklem said: “We held the policy rate steady because we want to allow monetary policy time to cool the economy and relieve price pressure.” Canadian inflation has moderated further of late, with headline inflation declining to 3.8% on an annual basis during September from 4% previously. Recent weaker economic data, such as softer Retail Sales, had further cemented expectations for a pause. USD/CAD was boosted throughout the week by both a broadly strengthening USD and the BoC announcement, with the pair moving back over 1.3800 for the first occasion since March. Further underpinning the recent CAD decline has been moderating oil prices, which have declined throughout the week despite ongoing geopolitical risks threatening future supplies. Friday’s October employment report dominates next week’s Canadian data. Last month’s 63.8k gains contributed to a strong-looking report, with overall unemployment at 5.5%. Higher energy costs contributed to a surprising increase in Australian headline inflation. Consumer price inflation (CPI) rose by 1.2% in the three months from July to September, rising from 0.8% previously. Markets had been expecting a slightly lower increase of 1.1%. Annual inflation was also higher than estimated, rising by 5.4%, having been predicted to rise by 5.3% over the past quarter. Having previously expected the RBA to maintain Australian interest rates at the current 4.1% for a prolonged period, many of the major Australian Banks are now expecting the RBA to hike rates at November’s meeting, given surprisingly sticky inflation. At the time of writing, AUD/USD looks set to post another marginally negative week, falling by around 2.2% overall to about 0.6330. NZD/USD replicated the move, slipping for the fourth week alongside the other major currencies against the greenback. Indeed, at one point, the pair slipped to as low as 0.5773, a level not tested for almost a year. Looking ahead, next week has the potential to experience increased volatility at times, with both the latest Australian Retail Sales as well as New Zealand’s Q3 employment report due to be released. USD
CAD
AUD & NZD
Author
Sam Mills - New Business Dealer
This commentary does not constitute financial advice and all quoted rates are sourced from Bloomberg.
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