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The latest figures released earlier this week indicate the UK labour market continues to moderate. Whilst overall unemployment improved marginally from 4.3% to 4.2% during the three months to August, the number of unemployed workers increased by 82,000 over the same period. The ONS has derived that figure using a new methodology, which now includes jobs data sourced from HMRC.
The latest (flash) UK PMIs were slightly more mixed. The key Services sector declined further from 49.3 to 49.2 over the past month, which could add weight to concerns about a potential recession in Q4. Whilst the feedthrough loop from PMIs to GDP growth isn’t always consistent, the overall weakness points towards sluggish growth. Combined with broadly weaker economic activity, this could suggest that the BoE may continue to hold UK interest rates at current levels at its meeting next week. Markets have also priced in a continued pause, keeping rates at 5.25%.
The one fly in the ointment for the BoE remains persistent UK inflation. After steadily moderating throughout this year, the latest inflation figures suggest a slowdown in the pace of declines. Furthermore, recent higher energy costs could also help to keep headline inflation elevated for longer.
The ongoing decline in GBP/USD has continued throughout this week, albeit at a slower pace, with the pound briefly slipping below 1.2100, recording a 0.5% drop overall.
After ten consecutive rate hikes, the ECB maintained the key Euro area interest rates at current levels at this week’s ECB meeting. The ECB has previously raised rates by a cumulative 4.5% since its first hike in July last year. During the ECB’s press conference, ECB President Christine Lagarde admitted that the economy was weak but highlighted price pressures remain strong. She also suggested that any talk of rate cuts was still premature. Despite those comments, market-implied expectations for around 70bps* of cuts by the ECB throughout the next year remained unchanged after the meeting.
*Source: Bloomberg. As of 26/10
Ahead of the ECB, there were a few brighter spots among incoming data, albeit from a low base. The latest German IFO business survey registered broad improvements across the board, just a day after a slight beat in the latest German Manufacturing PMI, and posting the first such jump for the survey in six months. Expectations rose from 83.1 to 84.7, having been predicted to have increased to 83.3.
The overall Business Climate also improved from 85.8 to 86.9 over the past month. In a nod to Christine Lagarde’s comments, the latest regional PMIs were more disappointing, with all three major components of the survey missing estimates and further deteriorating over the past month. In particular, the Composite slipped to 46.5 from 47.2.
The single currency has also experienced a volatile week, with EUR/USD initially rising to almost 1.0700 before gradually moderating. By the European close yesterday, the pair had declined to below 1.0540 and had slipped by 0.7% in total over the course of the week. GBP/EUR also moved slightly higher and is close to recapturing the 1.1500 region, highlighting the pound’s slight dominance over the single currency.
Given the recent economic headwinds, the latest German and Regional growth data is expected to dominate incoming data next week, with preliminary Q3 GDP on Mondayof particular interest.
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