06 December 2023

GBP

Rishi Sunak gave his first keynote speech on policy since becoming prime minister, earlier in the week. During his speech, he asked the public to consider his ‘five promises’ on which he should be judged by at the next election, as he strives to deliver ‘peace of mind’ to an ever-more disgruntled public. Those promises were; 1) to cut inflation by half, 2) to grow the economy, 3) reduce the national debt, 4) reduce NHS waiting lists and 5) stop illegal immigration across the channel from France.

The prime minister is already getting some help with (1), given that the last two inflation reports have thankfully been trending lower, albeit at the margin for now. However, food price inflation remains a major concern, with prices surging by 15% throughout the past year. Whilst each of those promises seems to be sensible enough, Sunak gave little detail on by how much he would need to improve on for numbers between 2-4 to, to have been considered successful. That point was not lost on most observers.

Sunak certainly has his work cut-out on growing the economy, with the latest data reflecting the opposite and ongoing, accelerated weakness. The latest mortgage approvals for November dipped to 46k, which is perhaps no surprise given the huge increase in interest rates, fuelling recent declines in activity and price reductions. The latest Halifax house prices for December will be released next week.

GBP/USD had been bouncing between 1.1900 – 1.2200 since before Christmas, only breaking to the downside on the latest US data (see USD) released yesterday afternoon, with the pair likely to continue to remain at the mercy of broader dollar moves for the time being. GBP/EUR has been even more rangebound, retaining a 1.13 – 1.14 range since the 21^st December.

Thoughts from the dealing desk

-Sam Mills, Private Established Dealing Manager 

EUR

The last ECB meeting of the year will be remembered by the overly hawkish commentary from the ECB’s Lagarde, who was resolute in her determination to ensure that markets were aware of the ECB’s commitment to tackle inflation, by continuing to raise rates aggressively. Markets were quick to price-in a more aggressive hiking path from the ECB. Given the recent declines in German, French and Spanish inflation, there is every chance that the region-wide data will also reflect further softening, when the key data is released later today (Friday). It is hoped that the key harmonized index of CPI dips back under 10%, perhaps to as low as 9.7%, according to estimates.

This news, coupled with recent improvements in broader data, as well as ongoing softening in energy prices, due in part by a much warmer than normal winter in Europe, may give the ECB some serious food for thought when considering the size of their next rate hikes.

As for the single currency, well the combination of the hawkish ECB, and some surprising improvements to key data, have helped to ensure that the Euro is looking much firmer into 2023. EUR/USD recently moved as high as 1.0700, and whilst the pair remains vulnerable to recent strength in the USD, such as has been the case this week, it still remains way above the key parity region.

USD

It has not been a good week for risk assets, with the latest FOMC minutes and incoming US data combining to give markets a bearish backdrop throughout the week. There was no ‘new’ news to be had from the latest Fed minutes to give markets a boost, with Fed members noting the recent declines in inflation, but highlighting that it would take ‘substantially more evidence’ of progress to confirm an ongoing downtrend. All Fed members agreed to the smaller rate hike last month, but they want to maintain ‘flexibility’ on future rate moves, which makes sense of course. They also see higher rates for ‘some time.’ Having not believed the Fed initially after the FOMC meeting, markets now look to be far more in agreement, given the ongoing underlying strength in the US economy, although the outcome of the terminal (final) rate is still contentious.

On the data front, the robust US labor market also continues to deliver ongoing strength, with the latest JOLTS job vacancies, ADP (private payroll), as well as less-than-expected initial jobless claims, all helping to boost that strong labor market narrative. On the JOLTS front, which the Fed monitor very closely by the way, there were 10.458M openings posted through November, frustratingly higher than 10M expected. The latest ADP report saw private payrolls bouncing back by 235K last month, after only reaching 127K previously. The combined news has helped to convince markets that today’s payroll report will be another strong one. Analysts currently expect a 200k on the headline, a slight consolidation after last month’s 263k gains. Markets will embrace any weakness, and vice-versa, with the dollar likely doing in the opposite direction, if markets play to form.

Next week’s calendar is dominated by the latest US inflation report. Any further signs of softening could help to sway market expectation at the likely size of the next Fed rate hike. As for the dollar, the greenback rebounded toward the end of the week, as markets reacted to the stronger data and FOMC minutes. The dollar index (DXY) had previously slipped to the recent low of 103.00, but rebounded strongly, hitting 105.00 by yesterday afternoon. USD/JPY continues to be impacted by both the Fed and the recent changes to yield policy from the BoJ, resulting in a recent drop below 130.00 for a brief spell, before rebounding strongly back over 133.00. According to reports, the BoJ are now also considering raising their key inflation targets.

CAD

It has been a busy week for the Loonie, despite the lack of keynote data out of Canada, notwithstanding today’s payroll data. The trending weakness in the price of oil seems to be having a limited impact on the short-term profile for the Loonie. That may be partly due to the fact that we are more in middle ground in absolute price terms, which tends to historically weaken the correlation between the two.

USD/CAD opened the week at 1.3530, and was at 1.3570 by the European close yesterday (Thursday) evening, which might suggest a lacklustre range. However, in-between the pair has moved as high as 1.3685, and low as 1.3470, with both levels being reached on the same day. That range looks vulnerable over the next day, as the latest (December) Canadian labor report is due. Markets expect a similar gain for the headline net change in employment, which came out at 10.1k last month, with a slight increase in the unemployment rate from 5.1 to 5.2%. GBP/CAD is also maintaining the recent trend lower, slipping back through 1.6150, having been as high as 1.6800 earlier in December.

There is a thin data agenda out of Canada next week, so the Loonie will take its direction from the broader greenback moves once again.

AUD & NZD

Both the AUD/USD and NZD/USD have been on a strong rally since October, with the former rallying to above 0.6800 and the latter to 0.6500. However, those moves have stalled of late, which may be due to the lack of positive market drivers, leading to profit-taking driving consolidation. The news that China have abandoned much of their zero Covid policy, leading to a drive higher in manufacturing will take time to sink into the export data for both Australia and New Zealand. However, this could help to give both currencies a lift over the year, notwithstanding other events and the general greenback direction.

Looking into next week, the latest Trade data and Retail Sales are due for release from Australia. The latter is expected to show a strong rebound, given preliminary data released from the Australian Retail Association at the beginning of the year covering the crucial December period. As for the RBA, well a more cautious approach looks likely with consensus opinion homing-in on two rate hikes from the RBA over the year at present.