UK: Weekly FX Market Update 14 November

GBP

• The pound had a decent week last week as it capitalized on negative US$ sentiment and managed to stay supported against a buoyant euro.

• Behind the scenes UK GDP disappointed the market by declining 0.6% in September.

• The Bank of England said that it is expecting a two year recession. Could this GDP decline be the start of it?

• Nurses, railway workers, university lecturers and civil servants are all striking or due to strike in the coming months. Could the country be facing a ‘winter of discontent’?

• Average earnings and CPI are released this week. With UK inflation above 10% and workers demanding wage hikes, could there be a wage price spiral and push the pound lower?

Despite the initial bounce Sterling received from the new team of Sunak and Hunt and the mini-budget, GBPUSD was still only at 1.1300 on Monday morning. US inflation, however, shows signs of peaking with a disappointing reading on Thursday of 7.7%, against an expectation of 8% - allowing the pound to strengthen over 2% on the week against the greenback as the market is starting to ‘buy risk’.

The UK budget is announced this Thursday, with the Chancellor looking to fill a £50 billion budget deficit. The country is facing higher interest rates, tax hikes, cuts in government spending, all whilst GDP is already declining. Could this all prove too much for the pound and push it lower after the budget?

EUR

• ECB President Lagarde said the ECB ‘must’ get back to 2% inflation – a bullish sign for the Euro.

• ECB Board member De Guindos kept up the hawkish rhetoric saying that quantitative tightening will start ‘sooner or later, for sure in 2023’.

• Ukraine is repelling the Russian invaders, adding to positive euro sentiment.

The euro has benefitted from the US$ weakness after the surprising fall in US CPI last Thursday. Risk sentiment was also given a boost as China relaxed its covid restrictions and news from the Ukraine was positive. Could this sentiment continue to push the euro higher or will the dollar stage a comeback?

USD

• The Federal Reserve has been focusing on reducing inflation by imposing four huge 0.75% interest rate hikes since June this year.

• US CPI surprisingly missed estimates of an 8% rise, coming in at 7.7%.

• US 10 year yields fell by 0.4% and the market reduced its 0.75% rate hike expectations for December to 0.5%.

• The US$ fell over 2.5% in 24 hours against its peers, following the US CPI release.

• Mid-Term elections mean that the Republicans control the House of Representatives, while the Senate could stay in Democrat hands.

The market heaved a huge sigh of relief as US CPI showed signs last week that it could have peaked. Interest rate expectations have been since dropped for the next FOMC meeting, however, the US economy is still performing much better than its peers The Federal Reserve has said that once interest rates have hit their terminal rate, they will stay there until inflation is on course to hit 2%.

With the euro 8% higher against the dollar from it’s earlier lows this year, and the pound 12% higher than just 2 months ago, could these prove to be beneficial rates against what could happen over the next 6 months?

RoW

China eased its quarantine and flight bans at the end of last week and helped produce a period of ‘risk on’ sentiment.

Events for the weekend ahead:

Mon Nov 14

10:00 EUR Industrial production

12:00 GBP Monetary Policy Report Hearings

Tue Nov 15

All Day G20

00:30 AUD Monetary Policy Report Minutes

07:00 GBP Average earnings/Claimant Count/Unemployment Rate

10:00 EUR Flash GDP/Trade Balance/ZEW Economic Sentiment

13:30 USD Producer Price Index

Wed Nov 16

All Day G20

07:00 GBP CPI

13:30 CAD CPI

13:30 USD Retail sales

14:15 USD Industrial Production

Thu Nov 17

00:30 AUD Employment Data

10:00 EUR Final CPI

12:00 GBP UK Budget

13:30 USD Philly Fed Manufacturing Index

Fri Nov 18

07:00 GBP Retail Sales