7 October 2024

GBP

A week into October and currency markets are warming up, despite the cooler autumnal weather. Volatility has been incredibly high, largely driven by conflict in the Middle East. As traders took the common run to safety, USD strengthened, while GBP dropped by more than 2% against it.

Sterling weakness was further compounded by comments from Andrew Bailey, the Governor of the Bank of England, who cast doubt on the BoE’s stance ahead of their next policy meeting on 7 November. Bailey suggested that bank cuts could become “more aggressive” than expected, diluting some of the Pound’s strength against the USD and the Euro as its higher yield against both currencies looks like it might be short-lived.

However, Andrew Bailey's stance was countered by MPC member Huw Pill, in his remarks that a more cautious approach should be taken towards future interest rate cuts, and that while inflation levels are expected to rise to 2.5% around Christmas, they will likely move back towards the target 2% in early 2025. It is worth noting that the Bank of England has not cut interest rates at consecutive meetings since 2020. 

August GDP data is due to be released on Friday, with expectations of a 0.2% reading, showing a slight uptick on the previous stagnant release. This could signal some further capacity in the UK economy for monetary easing from the Bank of England. Manufacturing and Industrial production figures are also expected to show some positive movement in the UK economy, which could bolster the Pound’s standing.

EUR

September saw the Eurozone inflation rate drop below the ECB's 2% target range to 1.8%. Core inflation, which excludes the cost of food and energy, fell to its lowest level since February 2022. These figures have raised expectations of an October ECB rate cut.

The ECB has already cut rates from record highs twice this year, and markets now expect even quicker policy easing with moves in October and December fully priced in as inflationary pressures are easing faster than policymakers had expected.

According to Eurostat, retail sales in the eurozone saw a modest recovery in August, when trade volumes rose by 0.2% compared with July. At the same time, the European Union saw a 0.3% increase. Although the figures were in line with economists' expectations, the annual reading for the eurozone fell short of the anticipated 1% rise, reflecting some softness about consumer spending dynamics across the currency bloc.

USD

The US Dollar was boosted at the close of last week by a bumper jobs report, helping to push the USD up over 2% versus the GBP, and showing similar gains against the Euro. In September, the US economy added 254,000 jobs, which was significantly higher than the forecast 140,000 figure. In addition, August’s figure was revised upwards from 142k to 159k, while the headline unemployment rate unexpectedly fell from 4.2% to 4.1%.

These gains have cast doubt on the Federal Reserve’s next move on interest rates. The Fed was expected to cut a further 25-50 bps at their early November meeting, but the question now is whether there will be any further loosening of monetary policy at all. Expectations of a 100 bps change to US interest rates between September and the end of the year are now looking increasingly unlikely. 

US CPI figures are due for release on Thursday, and PPI on Friday, will now be closely watched by markets in order to gain further clarity on the approach that the Fed is likely to take in the coming months. The US Dollar continues to hold its strength amid increased capital flows as a safe-haven as tensions in the Middle East continue to escalate.

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.