Red hot week for economic data, as temperatures across the UK plummet

Things have been looking brighter for the pound in recent weeks and the pound finished last week strong, after suffering a near two and a half cent (1.2345 to 1.2106) slide against the greenback (GBP/USD) from Monday to Wednesday. The pound has benefited from an improved ‘risk on’ appetite in recent weeks and responds well to positive news. Cable finished the trading week on the 1.23 handle.

The positive news in question relates to recent comments from US Federal reserve chair Jerome Powell’s comments around a slowdown in the rate hiking cycle in the US. A 50-basis point hike was almost confirmed by Powell in Wednesday’s latest Fed policy meeting, a reversal from the recent string of 75bp hikes. The Fed are having to deal with a dip in the Inflation levels in the US. Recent data announcements for US inflation slow a drop in previous levels of inflation. Ultimately this has caused the Fed to slow down their previous 75bp bullish approach to rate raises.

The pound along with stocks have been put under pressure by the continual weight of US interest rate hikes throughout 2022, so this slight change in tone gives support for the pound. The relationship between the pound and the stock market is one to keep an eye on. The pound is known to have a positive relationship with the S&P 500, which is known as the benchmark for global investor sentiment. When investor confidence peaks, more money flows into the UK thus creating a demand for GBP. Traditionally the UK suffers from a current account deficit, as an island nation we import more goods than we export so buy more foreign currency than we earn in GBP. Greater flows of currency into the UK, will typically see the pound rally as the current account deficit is ‘plugged’.

In addition, China has recently announced a relaxation of strict COVID-19 protocols across the country. Zero-COVID Protocols have been in place across China for almost 3 years since the first outbreak began in early 2020. This change in approach from the second largest economy has given a small change in tone to investor confidence, which in turn supports the pound.

Against the Euro the pound was stuck within 1 cent range (1.1673-1.1571) throughout the week, with the pound again finishing the week strong with a rally closing the week nicely for Sterling. The pound finished the week at trading at 1.1670.

The week commencing 12 th December is a data heavy week across the world, this morning GDP figures for October in the UK were announced with a 0.5% reading for the UK released, a slight upturn in the 0.4% reading forecast. An uplift from the -0.6% recorded for September. Nevertheless, there are still stark warnings from the Chancellor Jeremy Hunt, that the UK faces a recession. The UK recorded a -0.3% growth figure for the most recent quarter, which means should this current quarter provide negative growth we will officially be in a recession. This positive news on GDP has yet to influence the pound this morning. Tuesday, we have US inflation levels, with 7.3% the forecasted down from the previous 7.7%. Thus, linking the comments earlier in the blog about why the Fed are having to alter their approach. Wednesday morning UK inflation levels are being released; a 10.9% forecast is expected down from the previous 11.1%.

Wednesday and Thursday are arguably the most important days this week, it sees the Federal reserve have their latest round of interest rate talks on Wednesday. It is widely expected a 50bp hike is set to be approved, taking US interest rates up to 4.5%.

Thursday lunch time the Bank of England are set to announce a further 50bp raise for interest rates in the UK. This means from December 2021- December 2022 the UK base rate will have increased from 0.1% – 3.5%, the bank is still consistent on achieving their 2% inflation agenda. An eyewatering rise for anyone who has had to secure finance from the banks in recent months.

One key piece of information to watch is how the policymaker’s vote. There are 9 policymakers who sit on the bank of England monetary policy board, they will all vote for what rate raise they deem appropriate. There are some reports there could be the first 4-way split since 1997, which could cause volatility on the pound depending upon how the results show. The markets will digest the split as to future approaches from the bank regarding rate raises. More votes skewed towards a smaller hike could in turn suggest the bank may also look to slow down on its interest rate policy in coming meetings as more members of the board are starting to share the same opinion.

The European Central Bank will also speak on Thursday afternoon to give their latest interest rate decision, the ECB are typically known as the more ‘laid back’ of the big three central banks. One of the key reasons as to why they are deemed ‘laid back’ is the Eurozone consists of 19 countries who all adopt the Euro as their currency, when the ECB raises rates, it effects 19 different economies who are all in contrasting economic condition. Germany often known as Europe’s powerhouse will have the same interest rate as Greece, a country with a troubled economic past. Consequently, they historically are more methodical in their approach to changing policy. This rate raise will take rates across the eurozone to 2.5%.

With the weather set to dip well below freezing across the UK this week it may be wise to speak to one of our highly experienced team and see if we can help you get your currency exposure wrapped up with one of our contract options.

There is a red-hot week of economic data lined up which can cause volatility swings, do not get caught out in the cold!

For further questions on how we can assist with your currency requirements please email us directly [email protected]