Rishi Sunak gave his first keynote speech on policy since becoming prime minister, earlier in the week. During his speech, he asked the public to consider his ‘five promises’ on which he should be judged by at the next election, as he strives to deliver ‘peace of mind’ to an ever-more disgruntled public. Those promises were; 1) to cut inflation by half, 2) to grow the economy, 3) reduce the national debt, 4) reduce NHS waiting lists and 5) stop illegal immigration across the channel from France.
The prime minister is already getting some help with (1), given that the last two inflation reports have thankfully been trending lower, albeit at the margin for now. However, food price inflation remains a major concern, with prices surging by 15% throughout the past year. Whilst each of those promises seems to be sensible enough, Sunak gave little detail on by how much he would need to improve on for numbers between 2-4 to, to have been considered successful. That point was not lost on most observers.
Sunak certainly has his work cut-out on growing the economy, with the latest data reflecting the opposite and ongoing, accelerated weakness. The latest mortgage approvals for November dipped to 46k, which is perhaps no surprise given the huge increase in interest rates, fuelling recent declines in activity and price reductions. The latest Halifax house prices for December will be released next week.
GBP/USD had been bouncing between 1.1900 – 1.2200 since before Christmas, only breaking to the downside on the latest US data released yesterday afternoon, with the pair likely to continue to remain at the mercy of broader dollar moves for the time being. GBP/EUR has been even more rangebound, retaining a 1.13 – 1.14 range since the 21st December.
The last ECB meeting of the year will be remembered by the overly hawkish commentary from the ECB’s Lagarde, who was resolute in her determination to ensure that markets were aware of the ECB’s commitment to tackle inflation, by continuing to raise rates aggressively. Markets were quick to price-in a more aggressive hiking path from the ECB. Given the recent declines in German, French and Spanish inflation, there is every chance that the region-wide data will also reflect further softening, when the key data is released later today (Friday). It is hoped that the key harmonized index of CPI dips back under 10%, perhaps to as low as 9.7%, according to estimates.
This news, coupled with recent improvements in broader data, as well as ongoing softening in energy prices, due in part by a much warmer than normal winter in Europe, may give the ECB some serious food for thought when considering the size of their next rate hikes.
As for the single currency, well the combination of the hawkish ECB, and some surprising improvements to key data, have helped to ensure that the Euro is looking much firmer into 2023. EUR/USD recently moved as high as 1.0700, and whilst the pair remains vulnerable to recent strength in the USD, such as has been the case this week, it still remains way above the key parity region.
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