GBP/USD reached an impressive three-month high at over 1.2150 this week, which seems incredulous really given the persistent negativity that seems to surround all things to do with the UK economy at the moment. Indeed, just this week we have seen the OECD place their projected outlook for the UK at the bottom of the growth list (again) amongst all G20 countries – barring Russia. At least we might outgrow someone. The latest economic data should have hardly encouraged a bull run on the pound either, with a rather sombre report released this week highlighting how UK public sector borrowing rose a whopping £13.5bn during October, roughly £4.4bn more than this time last year, as the measures to support households and businesses with their energy costs, start to eat into the government’s coffers. On the plus side, there was at least a slight improvement over estimates in the latest S&P/Global PMI data, with the overall composite moving up from 48.2 to 48.3. That may sound modest, but analysts had pencilled in a decline to around 47.5, which could be a reflection that things are not quite as bad as they could be at the moment, even if only at the margin.
Gilt yields also continue to soften, which as well as giving the government some comfort, has helped to ensure that 5-year mortgage rates have now drifted back below 6% for the first time in over seven weeks. That may give something of a boost to the property market, although the BoE seem determined to raise UK rates further in their ongoing effort to tame inflation, so the boost may only be fleeting in nature.
Back to the pound, and much of the move behind the strength in GBP/USD has been fuelled by the weakening dollar, but whilst the OECD may themselves be particularly negative on the UK, markets are far more sanguine and prepared to give Rishi Sunak and his chancellor some time to get their house in order, evidenced perhaps by the emerging strength of the broader pound, with GBP/EUR pushing sharply back over 1.1650. Looking ahead, next week is a quiet one for UK data, so the pound is likely to take its influence from the dollar side of the pond.
Much the same as in the UK, this week has been a case of bad, but not as bad as it could have been amongst the key Euro area data releases. Although the latest PMI readings across the region highlight ongoing weakness and further signs of a slip into recession, all major components beat estimates, which may be an indication that the slowdown might not be as harsh as had previously been imagined. Furthermore, supply constraints are showing tentative signs of easing, notably in Germany. The latest German ZEW survey also beat estimates in two out of the three components (Business Climate & Expectations). The size of the next ECB rate hike is still up for debate, with the ECB’s Robert Holzmann leaning toward another 75bps rate hike next month. Christine Lagarde suggested that the ECB will keep raising rates and may need to restrict growth, in their battle against surging inflation in the region, which should ensure that the ECB go for another bold hike, even if it is not quite at the level Holzmann would like to see. Next week’s region-wide harmonised CPI is expected to see another unwelcome jump from 5 to 5.2% (YoY). Markets are currently undecided on rates, with a clear split between 50 and 75bps, with the fate of inflation likely to tip the scales in one direction or another.
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