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Following the Federal Reserve's decision to hold rates, sterling gained momentum
Sterling powered upwards against the US dollar yesterday following the Bank of England decision on interest rates. Not so much because of the decision to hold rates at 5.25%, but because of the relatively hawkish comments from the governor Andrew Bailey, and because three members of the nine-member panel voted to raise rates.
The Bank of England is clearly more concerned about stubborn inflation than US central bankers, and the pound gained more than 1% on the US dollar over the course of the day, to hit its highest level since the summer.
It was a choppier day for GBP/EUR, with a rise of half a percent in 30 minutes after the BoE pronounced on rates, which soon slipped back to an even result over the day.
So yesterday was all about the central bankers. Bailey of the Bank of England and Christine Lagarde of the European Central Bank (ECB) were speaking in the wake of the US Federal Reserve’s decision on Wednesday also to hold rates. Federal Reserve chair Jerome Powell’s comments were taken to be relatively dovish, leading many analysts to predict an earlier drop in rates. Other central banks tend to follow the lead of the Fed, so to hear Andrew Bailey so clear on the need to keep rates high boosted sterling. However, even with the UK still having the highest inflation in the G7, the markets are nevertheless beginning to price UK interest rates reducing to 4% by the end of 2024.
Elsewhere on the data from yesterday, British surveyors were less pessimistic about UK property values, but 43% more surveyors believe prices are set to fall than believe they will rise.
Overnight we have had a reading for GfK Consumer Confidence in the UK, which came in at -22 for December, showing a slightly more optimistic outlook from British consumers than November’s -24.
Moreover, confidence in personal finances has recovered from -29 of a year ago to -2.
In the US, retail sales defeated low expectations to rise 0.3% between October and November, and initial jobless claims were less than expected at 202,000 – all indicative of a soft landing.
Last night the European Union failed to agree a €50bn package of aid to Ukraine, due to a veto from Hungarian prime minister Viktor Orban, an ally of President Putin. However, they, but did not block Ukraine’s next stage in applying for EU membership.
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GBP: No rate cuts. “There is still some way to go.”
Sterling joined the euro in shooting upwards against the US dollar, gaining well over 1% on USD.
However, overall the pound remained stable as interest rates were held at 5.25% and Andrew Bailey insisted that interest rate drops were a long way off. “There is still some way to go,” he warned on inflation. “We’ll continue to watch the data closely and take the decisions necessary to get inflation all the way back to 2%.”
The heavy-hitting data continues to arrive, with GfK Consumer Confidence last night showing a small improvement on last month but a much better outlook than last Christmas.
Coming up this morning we’ll see a flash reading for S&P Global/CIPS PMI. Services for the UK have been in positive territory of 50+, but will that continue?
On Wednesday will be the all-important inflation reading. Another steep(ish) fall to 4% is expected.
GBP/USD past year
EUR: No rate cuts. “No discussion, no debate.”
The euro moved in lockstep with sterling against the US dollar yesterday, gaining over 1% as Christine Lagarde made it clear that the ECB did not see the battle against inflation as won. “Should we lower our guard?” she said. “We asked ourselves that. No. We should absolutely not lower our guard. We did not discuss rate cuts at all. No discussion, no debate.”
She was supported in this by Spanish inflation data yesterday that was upwardly revised to 3.3% in the year to November.
This afternoon there will be a reading for French inflation (currently 4% but expected to fall to 3.4%) and also a flash reading for the Purchasing Managers Index (PMI) across the eurozone as a whole, but also in key markets. Watch out especially for German manufacturing PMI, which could well move the dials if wildly different than the 43.2 expected.
Next week starts with the Ifo Business Climate report for Germany and on Tuesday eurozone inflation.
USD: Possible rate cuts. Dollar drops sharply
Jerome Powell’s apparent volte face on Wednesday led to the US dollar losing heavily in the past couple of days. USD hit a four-month low against EUR and a three-month low against GBP.
On the data front, however, there was good news for the economy with better-than-expected news on retail sales (growing by 0.3% last month and 4.1% more over the year) and jobs, where new unemployment claims were less than predicted.
It’s a relatively quiet afternoon to end the week, although the US also has a PMI reading.
The week before Christmas includes GDP on Thursday and personal and spending on Friday.
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