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The pound fell to its lowest rate against the euro since May 2023
The pound fell to a six-month low against the euro on Friday after a mixed bag of economic data for both the eurozone and the UK favoured the euro.
UK economic growth held steady for the year in September 2023, remaining at 1.5% instead of declining 1.1% as markets had expected. While the UK is yet to slip into a technical recession, any chance that the Bank of England may hold interest rates for longer than expected would have a significant impact on borrowing costs across the board.
Bank of England governor Andrew Bailey and the Bank’s chief economist Huw Pill both warned that inflation was still too high, discouraging expectations that interest rates could be slashed as early as the summer.
European Central Bank (ECB) vice president Luis de Guindos warned traders to hold their horses on rate cuts, saying, “Any discussion about interest rates is premature.”
On Friday, the University of Michigan consumer sentiment fell to its lowest level in six months amid growing concerns about the negative effects of high interest rates and the ongoing war.
Any changes to the geopolitical situations in the Middle East, where Benjamin Netanyahu rebuffed a ceasefire-for-hostages offer, will be watched keenly. The ongoing conflict has already had a sizeable impact on risk markets and commodity futures.
Meanwhile, the Bank of England has asked more than 50 firms – among them asset managers, pension funds, and insurers – to take part in a simulated shock to the UK’s sovereign bond market. The move follows a period of wild volatility last autumn when the liability-driven investment (LDI) strategies of major money managers were destabilised around the mini-budget.
The coming week is set to be dominated by eurozone quarterly GDP growth, followed by Spanish and Italian inflation. Germany will also share the outcome of its ZEW economic sentiment index, a key indicator of confidence within Europe’s largest economy.
The US and the UK will both release their respective inflation and unemployment rates, for UK investors, this should provide further guidance. Retail sales data will also be a point of emphasis for US-focused accounts with Thanksgiving and black Friday just weeks away.
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GBP: Watch this space
It’s another big week for UK data, with unemployment and inflation numbers set to give a deeper insight into the state of the country’s finances. The jobless rate is forecast to come in at 4.4% for September from 4.3% in August.
More currency volatility should be expected on either side, particularly considering EU member states have their own data sets to present.
Last week was punishing for sterling. The pound dropped by around three-quarters of a per cent against the euro and by 1.5% against the US dollar, mainly driven by weak growth figures.
GBP/USD: the past year
EUR: Spain and Italy out with inflation stats
Christine Lagarde was tight-lipped on any upcoming policy changes when she spoke at a Financial Times event on Friday. Commerzbank meanwhile projected that the euro would stage a modest fightback against the US dollar over the next year.
We’ll get a chance to look at both Spanish and Italian inflation figures in the week ahead, alongside the ECB’s GDP reveal.
USD: Roadblocks threaten dollar advances
The greenback notched gains against the pound and the euro last week but faces more uncertainty this time around, given renewed fears of a government shutdown.
The University of Michigan consumer sentiment index dropped much more sharply than expected, down to 60.4 from 63.8 in October, marking the lowest it’s been in six months. This could signal American consumers are wary of the interest rate environment, inflation, and recent geopolitical shocks.
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