Well, That was a Quiet Week – Sterling Update



Well, That was a Quiet Week – Sterling Update


The past week has been something of a rollercoaster ride for UK asset prices, the pound, the government and Bank of England (BoE). It all started fairly calmly enough last Thursday, after the BoE announced an expected 50bps UK rate hike, and plans to begin the process of reducing their bulging balance sheet with an orderly selling of UK gilts (QT). The next day, the government announced in their mini-budget, an attempt to spur economic growth with aggressive tax cuts and massive borrowing plans, deliberately aimed at the top-end of the pay scale in order to generate a ‘trickle-down’ effect. The rest, as they say, is history, and has been colourfully documented around the world.

As we (and just about everyone else) have highlighted throughout this week, the measures from the government look like doing more harm than good for the UK economy. Indeed, the good people at the IMF said that if nothing else, the measures proposed by the government could rapidly increase UK inflation, at a time when central banks were actively trying to reduce it.

Markets quickly arrived at the same conclusion, and the pound and UK gilts came under intense selling pressure from the get-go on Monday. The yield on the UK 30-year gilt surged to around 5%, and GBP/USD dropped to its lowest level on record of around 1.0300, albeit in that particularly thin and choppy Asian Monday morning session. With serious risks to both the UK pension and property markets, as well as the potential of a catastrophic impact to the broader economy, the BoE had little choice but to intervene, announcing plans to ditch their planned QT sales and instead start buying the long-end in clips of £5bn per day for 13 weekdays, with a package totalling around £65bn. The news sparked a spectacular reversal for gilt yields, which fell over 100bps on the day, which is a record for a single daily move. Although yields have moved slightly higher since, the presence of the BoE has ensured that those rises have been far more orderly. The BoE did the right thing by leaving sterling to the markets. Going forward, markets still expect a very hefty rate rise from the BoE at their next meeting, and there remains much doubt as to whether the government’s programme will/can work, and whether the BoE’s intervention attempts will only delay the inevitable selling pressures down the line. Clearly, incoming UK economic data will be closely scrutinized by markets. In the meantime, the government have stood firmly behind their proposals, and the pound has since found some worthy support, with GBP/USD trading back over 1.1200 for a spell by this (Friday) morning, and GBP/EUR dancing its way back over 1.1375, having been under 1.0800 for a spell on Monday morning. These numbers look like ‘normal’ monthly ranges.

Perhaps more tellingly, the latest opinion polls are now giving Labour an historic 33-point lead over the Tories, with Liz Truss is coming under mounting pressure from all sides to revise her plans. Interestingly enough, the latest UK growth figures have just been released this morning, and there was a pleasant upside surprise, with GDP increasing by 0.2% (QoQ/Q2), against an expected drop of about the same level.


The risk of a recession in Germany appears to be accelerating, with inflation having just risen to a 70-year high. German inflation reached double-digit levels for the first time since the 1950’s, with CPI tapping 10.9% (YoY) through September. The jump was perhaps no surprise, given that the range of government measures to limit prices on specific public services expired last month.

However, the impact of surging inflation in Germany is likely to push region-wide inflation to a new record level around 9.7%, when those figures are released later today (Friday). The news comes as Germany responded to the soaring rise in energy costs by announcing plans for a EUR 200bn cap on gas prices, which the Chancellor describes as a ‘defensive shield’.

Germany is satisfied that gas supplies will not run dry through this year and next, but the supply situation remains extremely tight, and the risk remains that were the country forced to ration supplies, there will be a dramatic impact on GDP through next year.

Given that inflation in the region continues to probe higher, the calls for another 75bps rate hike from the ECB at their next meeting have been increasing, with several key ECB members openly calling for an aggressive move again next month.

As for the single currency, well it has been a tale of two halves this week, with EUR/USD touching a new cycle low at 0.9535 on Wednesday before making a strong two-day recovery back toward 0.9800, rallying sharply alongside the other dollar crosses.

Region-wide Retail Sales (Thurs) are probably the pick of the bunch into next week, as well as a slew of PMI readings.

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