Worrying Times Ahead for Sterling
Worrying Times Ahead for Sterling
Last week the Bank of England gave one of the gloomiest outlooks that we can remember when it forecasted that inflation would top out at 13.3%, with the country entering at least a year-long recession shortly after. The Old Lady has been consistently wrong in its inflation forecasts, and many feel that it is optimistic. However, what is clear is that the new Prime Minister and the UK as a whole face a period of stagflation. It is a challenging position as interest rates should have been moved earlier and now the BoE faces having to raise interest rates in the face of a recession. No wonder sterling saw some selling last week, and certainly, against the dollar, it’s hard to see too many reasons to buy it. Friday saw surprisingly strong Non-Farm payroll data, pushing yields back up in the US, and it’s hard to see the Fed not tightening further and, by doing so, lending strength to the greenback.
Wednesday sees the publication of the minutes from the last Federal Reserve meeting, which should show their commitment to stamping out inflation. Some traders are looking for the Fed to pivot on its policy, but after last week’s plethora of speakers from the Fed were unrelenting hawkish, this doesn’t seem likely, and the minutes will reinforce this opinion. With this in mind, it seems fair to expect the euro and sterling to face some tough trading sessions ahead. The dollar may also benefit from its safe haven status if tensions between Taiwan and China continue to increase. Away from Geopolitics, the market will have US inflation figures to digest and GDP in the UK. However, it is worth remembering that many of the world’s traders are away on holidays in August, leaving the markets relatively thin on volume, which could exaggerate moves.
GBP
As we said in the opening paragraph, the Bank of England’s prognosis on the economy was worrying, to say the least. It will be interesting to see whether Liz Truss or Rishi Sunak have any recipes to prevent what appears to be an almost certain period of stagflation. Many believe the best hope is that the Bank of England’s forecasts continue to be as wrong as they have tended to be. However, it certainly feels like inflation is knocking 13% already when one looks at the weekly shopping bill, and it is fair to say that the 50bp move in Base Rate last week was too little too late. The window for further increases is rapidly closing as a recession approaches, and if we see another 50bp rise in September, that could be the last hike. This week’s critical numbers come on Friday with June’s Gross Domestic Product and the Second Quarter’s, which may disappoint. However, as in 2002 and 2012, it will probably be distorted by the Queen’s Jubilee Holiday. Also scheduled for release on Friday is Second Quarter’s GDP as well as Industrial and Manufacturing Production,
EUR
As a fellow commentator pointed out, this week’s calendar is as empty as trading desks are around the continent, with only industrial production scheduled for Friday and the German Consumer Price Index on Wednesday. Euro watchers will be unusually keeping an eye on water levels in German rivers, particularly the worryingly low Rhine, hampering river transport and cooling of power plants. The Eurozone, as the UK does, faces a tough winter ahead, and with such a dearth of economic data due, we hope that our neighbours on the continent are enjoying the delights of the French or Italian Riviera before returning to the reality of an energy crisis in the Autumn.
USD
Friday’s better-than-expected Non-Farm Payrolls data from the US raises the distinct possibility that the Fed will raise rates by another 75bp in September. The dollar has been on the backfoot recently, but with the Federal Reserve, the only major central Bank looking fully committed to raising rates till the pips squeak, this should reverse. As we mentioned earlier, the minutes of the last Federal Reserve meeting are published on Wednesday, which will underline the commitment of the Fed to stamping out inflation. This week we will see whether the tightening is having any effects with the publication of inflation data which many fear will still be rising uncomfortably quickly despite the headline annual rate dropping back below 9%. However, the core rate is still forecast to show a .4% gain pushing the core rate nearer to 6%… three times the Fed’s chosen rate of 2%. Also published is the University of Michigan Sentiment Index, which may recover as falling petrol prices cheer the consumer up.
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