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The UK's GDP rose in August
The US dollar strengthened sharply yesterday, by as much as 1% against the pound, 1.4% against the Australian dollar and 0.75% against the euro.
The cause was America’s inflation report. It showed no change in September, staying at 3.7% annually, with core inflation (without food and fuel) also unchanged at 4.1% annually, a rise of 0.3% over the month.
Although this was more or less expected, the markets clearly believe it opens the door to the US Federal Reserve resuming interest rate rises.
In the UK yesterday, the somewhat eclipsed big story was Gross Domestic Product (GDP), confirmed at a rise of 0.2% in August. This was a sharp recovery from July’s rain-affected 0.6% fall.
However, we shouldn’t assume that the economy will continue to strengthen. On BBC news yesterday, Dr Swati Dhingra, one of the Bank of England’s interest rate-setting committee the MPC pointed out that the effects of 14 consecutive interest-rate rises have barely begun to be felt: “The economy’s already flatlined. And we think only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy.”
This morning the BoE’s chief economist Huw Pill acknowledged that the decision was finely balanced but said that it was too early to start pricing for rate cuts: “The idea that the [monetary] policy stance will turn on a sixpence seems to be overdrawn.”
This morning the inflation data from Europe is coming in fast, although they are final results and less likely to move the dials. Of more interest to the markets might be speeches from European Central Bank president Christine Lagarde at the IMF meeting in Marrakesh, Morocco today and tomorrow.
In business news, the UK’s Competition and Markets Authority has changed its mind on the $75bn acquisition of online games creator Activision Blizzard by Microsoft, after changes to the deal.
EasyJet has enjoyed its busiest ever summer and reckons it could be on course to double annual profits to £1bn this year. On average easyJet passengers paid 11% more than last year: £105 per flight (with £75 of that on the fare and £30 for add-ons).
In the US, the strike by autoworkers that President Biden joined on the picket line earlier in the month, looks set to continue. Ford has offered to increase wages by 23% over four years, but among other demands, the union wants new starters, who normally start on barely half of the maximum $32 hourly wage, to see their ages rise faster.
Screen actors in the US also remain on strike, while screen writers have returned to work, in disputes over the use of AI in TV and movies.
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GBP: Growth returns to UK economy, for now
The US inflation news didn’t just affect GBP/USD. The pound dropped by around a third of a cent against the euro too.
From the UK’s GDP data, the most successful parts of the economy were services, especially in the professions and education, while sports activities dropped by nearly 11%.
There’s another big week for UK data upcoming, with unemployment and earnings on Tuesday, inflation on Wednesday and retails sales on Friday.
GBP/USD past year
EUR: Sharp moves in different directions
It was a decidedly mixed day for the single currency, with close to a 1% drop against the US dollar but a 0.3% rise against sterling.
This morning’s inflation data came in as predicted in the ‘flash’ report, at 4.9% in France and 3.5% in Spain. In the former that indicates inflation is neither rising nor falling, while in the latter it appears to be rising.
Christine Lagarde will be speaking today and again on Saturday afternoon.
There’s more inflation data on Monday and Wednesday, including the eurozone-wide result, but the big event will be the ZEW Economic Sentiment Index for Germany on Tuesday.
USD: Return to strength as prices stop falling
The dollar resumed its three-month long upward trajectory yesterday, powered by persistent inflation.
The Dollar Index (DXY) strengthened by 0.71% as inflation continued at 3.7% – not far off double the Federal Reserve’s target. Coming on top of last week’s outstanding non-farm payrolls growth, the Fed looks likely to continue monetary tightening.
Next week there will be retail sales on Tuesday and housing data on Wednesday.
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