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The Bank of England's Huw Pill said yesterday rate cuts could come in 2024.
Yesterday’s inflation data led to the pound losing against just about every other currency. However, the losses were not enormous – around a quarter per cent against the euro, yen and Canadian and Australian dollars, and half a per cent against the US dollar and yuan.
The reason for the fall was the notion that inflation falling to 6.7% (when a small rise was expected) allows the possibility that the Bank of England (BoE) may not, after all, raise interest rates at its meeting at lunchtime today. A 25 basis point rise is now believed to be roughly a 50/50 possibility, along with no rise.
In the US yesterday the Federal Reserve opted to hold its own headline interest rate steady at 5.5%. Its rate-setting committee, the FOMC, did however, indicate that there could be more rises to come in 2023 and probably fewer decreases next year than hitherto assumed.
The result was positive for the dollar, albeit with fairly modest rises of 0.10% to 0.40% against major rivals. Two-year US Treasury yields hit a 17-year high on the news, while stocks fell.
So far this morning we have had news on government finances in the UK with Public Sector Net Borrowing which came in slightly higher than expectations at £10.765bn in August.
In business news there was really only one story yesterday. British prime minister Rishi Sunak announced a delay on certain green policies, including that sales of petrol cars and gas boilers will now be allowed for a further five years, to 2035. He insisted that the UK could still reach net zero by 2050, and it was seen as a gamble to open a dividing line with the Labour Party as we approach an election year. It could even suggest an early election.
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GBP: Markets await more data and BoE decision
Sterling sank yesterday after the inflation data, but the falls were modest.
The main event of today will be the interest rate decision from the BoE at midday, with even a modest, dovish rise to 5.5% no longer priced in.
By this time tomorrow that may all be old news. With several influential readings: GfK Consumer Confidence at midnight tonight, retail sales at 7am and S&P PMI at 9.30am, volatility is entirely possible.
GBP/USD past year
EUR: Euro looks for direction on quiet day
While the pound slumped and the US dollar swelled yesterday, it was a mixed day for the euro with no great movements anywhere.
This was despite several of the ECB’s interest rate setters speaking. This morning we have had a reading for French business confidence of 99, an improvement on last month’s 97, and above market expectations.
Tomorrow there will be Spanish GDP, plus PMI readings across the eurozone. Will there be further signs of business optimism?
USD: Fed keeps options open
The dollar gained, as we predicted yesterday, not from the fact that interest rates were kept on hold, but from the possibility that they will rise again before long.
The Fed was upbeat in its assessment of the US economy, which is allowing it to hope that it can keep the pressure on inflation without forcing too much economic pain – the so-called ‘soft landing’.
There were no top level data releases yesterday, but today there will be some housing and mortgage reports and tomorrow there are flash readings for manufacturing and services PMI.
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