Weekly Brief

21 April 2023

GBP

The latest UK inflation data has helped to fuel increased market bets that the BoE will be forced into a more aggressive path of rate hikes, as they battle persistent UK inflation. Headline Consumer Price inflation (CPI) remained in double digits during March, with annual prices increasing by 10.1%. Whilst marginally lower than the previous 10.4% reading, the figure was higher than the estimated increase of 9.8%. Britain now holds the title as the only country in Western Europe with double-digit inflation. Who needs to win the Eurovision, hey. There was some good news on the inflation front, however, with the latest Producer Price Inflation (PPI) dropping at a faster pace than had been expected during March. Core PPI inflation increased by 8.5% on a yearly basis, down from 10.2%, and below estimates of 9.2%.

Whilst global energy and producer prices have thankfully deteriorated of late, persistently high food price inflation has increased the probability that the BoE will hike UK rates by another 25bps (to 4.5%) during their May meeting, with further hikes beyond May’s meeting now looking more likely, despite a still uncertain outlook for the UK economy. The BoE are far more likely to take future hikes on a meeting-by-meeting approach, as they assess incoming data. On a slightly more positive note, supermarkets have suggested that food price rises will ease soon, as wholesale global prices decline, according to the good folk at the British Retail Consortium. There was also a sharp drop in Retail Sales over the past month, according to data released earlier today. Retail Sales declined by 0.9%, versus 0.5% during March, which could be a sign of a struggling consumer.

GBP/USD has remained close to the recent high at just over 1.2500 for most of this week, fuelled in part by that higher UK inflation. The move came despite a broadly stronger dollar over the period. GBP/EUR is also starting to break higher once again, rallying back over 1.1350, after reaching a short-term base at just below 1.1300, despite a broadly robust Euro (see EUR).

-Joe Calnan, Manager- Corporate FX Dealing

EUR

The latest ECB accounts, which were released yesterday (Thursday), confirmed that the ‘large majority’ of the governing council agreed with Chief Economist Philip Lane’s proposal to raise rates by 50bps, during their most recent meeting. There had been some tension amongst certain members, given the ongoing banking wobbles at the time, with several suggesting that it might be more appropriate to wait for the banking tensions to subside – which they have thankfully done now. The accounts also confirmed that ‘monetary policy still had some way to go to bring inflation down.’

Markets currently therefore expect the ECB to follow on with at least two more 25bps hikes over the coming months, with recent hawkish rhetoric seemingly supporting the move. ECB governing member Klaas Knot suggested in a recent interview that it was ‘too early to talk about a pause in interest rate rises.’ The latest Regional inflation data, also released this week, has shown some moderation, easing to 6.9% in March from 8.5% during February. However, much of the decline can be attributed to a rapid fall in energy prices, with core inflation still frustratingly high.

Much the same as in the UK, persistently higher inflation feeds through to heightened market-implied expectations for future rate hikes, which will then further support ongoing rallies in the currency. On that note, EUR/USD is now edging back towards the recent high of around 1.1000.

USD

It is now less than 2 weeks away from the next Fed meeting, and markets have firmly settled on a 25bps hike outcome. At the time of writing, market-implied expectations had risen to 86%*, which is high enough for us to call it a ‘done deal’. Normally, anything over 70-75% is the trigger. Only a complete meltdown in next week’s US data, or another broader market wobble, is likely to derail the Fed. Aiding the increase has been a relative army of Fed speakers, who have given us enough forward guidance to cover the next 12 Fed meetings, let alone this one. We won’t complain, although today marks the last day of speakers before we enter into the Fed’s self-imposed quiet period.

After the recent inflation and payroll data, this week has been far quieter for US data, with most of the juicy bits emanating from the housing market. The latest US Housing starts decreased by 0.8% during March, with Building Permits also declining by a hefty 8.8% over the past month, as higher interest rates ate further into housing market performance. The following day saw the latest US MBA Mortgage Applications weakening by a further 8.8%, giving further evidence of a softening US housing market, were we to still need it. In other news, the key US 30-year mortgage rate also increased to 6.43%, the highest level in two months. That will also be a clear drag on activity going forward. Finishing things off were a soft Existing Home Sales print and Philadelphia Fed Manufacturing Survey yesterday.

The dollar has drifted slightly higher overall so far this week, with the dollar index (DXY) remaining around 100 pips above the key 100.00 - 100.30 region for the most part. On the one hand, the dollar should/has benefitted from the impending Fed rate hike, although beyond that looks more questionable, with markets awaiting to see what the Fed have to say about things. This may be a reason for the rangebound nature of major dollar pairs at the moment. That, and maybe worries over what happens to the greenback were the US to slip into a deeper slowdown or recession.

Amongst those dollar pairs, USD/JPY continues to drift higher, but that has as much to do with broader Yen weakness, given softer Japanese inflation and an ongoing reluctance by the BoJ to make changes to their YCC policy. USD/JPY tapped 135.00 earlier in the week for the first time since early March. Next week is also fairly light on major US data, with the latest (GDP) growth data the standout, coupled with Durable Goods Orders and further data from the housing market.

*Source: CME Markets

CAD

Canadian inflation slipped to its lowest level in almost two years, with the key Core CPI reading dropping from 4.7 to 4.3% on an annual basis during the past month. The good news on softening inflation will be a boost to the BoC, who recently decided to pause interest rate hikes to assess the cumulative impact on the Canadian economy. Today’s (Friday) Retail Sales data are predicted to reflect increased signs of a slowing Canadian economy, with Retail Sales expected to have declined by 0.6% over the past month, having risen by 1.4% previously.

Further evidence of a softening Canadian housing market was also evidenced on Wednesday, after the latest Housing Starts declined to levels last witnessed during the pandemic. The larger than expected decline in March looks to have been directly caused by the rapid increase amongst borrowing costs, although the recent decision by the BoC to pause rate hikes, may yet boost recovery prospects. USD/CAD rallied back over 1.3500 on Thursday, the highest level for a week. The move lower for the Loonie has been further impacted by a dip in oil prices over the past week, with Brent Crude prices slipping by over 5% since Monday, with that move being driven by increasing worries over reduced demand.

AUD & NZD

Confirmation that New Zealand (NZ) inflation has softened more than anticipated, helped to drive NZD/USD lower towards the end of the week. Annual CPI dropped to 6.7% from 7.2%, against an expected increase of 7.1%. The RBNZ have been aggressively hiking NZ rates at a record pace, culminating in a 50bps move to 5.25% earlier this month. The news could well impact the RBNZ’s thinking on rate hikes going forward, given their previous hawkish stance. They (RBNZ) had been predicting an increase amongst inflation to 7.3% over the period.

The minutes of the latest RBA meeting confirmed that the nine board members were remarkably close to raising the cash rate by another 25bps during April, given higher inflation and a robust labour market. The RBA suggested that they will need more time to assess ‘when and by how much more’ Australian rates will need to be lifted. Australian rates currently sit at 3.65% and next week’s inflation data could seal the deal. AUD/USD has had a fairly flat week, and remains above 0.6700, having bottomed-out at just under 0.6600 at the beginning of March.