GBP slump slows as data surprises & Eurozone inflation eases
GBP: Since August, GBP/USD has pulled back from a 1.3100 high to 1.2700 as the USD strengthened a little …. but in early Sep the UK didn’t raise rates as expected and we are now trading around 1.2400. GBP/EUR has slumped from 1.1700 to 1.1500 very quickly.
The Bank of England voted 5-4 to maintain rates at 5.25% - so it was a close-run decision, and the minutes of the meeting will be fascinating. The 2 biggest factors at play in the UK are (1) rising energy prices which might be external but look set to increase inflation once again (2) weak labour demand. Combined, this is likely to trigger stagflation – the last thing that the UK needs.
The latest GDP growth numbers showed higher than expected UK growth, which will ease fears of an intense UK recession, and helps to slow the drop in GBP
EUR: We know that the ECB is now taking a neutral stance on rates, with an ‘open mind. However, until today, we the indicators were for inflation remaining elevated in most member nations. These thoughts were dispelled as the latest EUR Inflation numbers showed a fall to 4.3% - The lowest since Oct21
Commerzbank has said “the ECB is unlikely to raise rates further”. But, the market is increasingly negative on the ECB’s ability to get through the coming months with a pro-active policy stance … which explains the weak EURO. Place continuously weak German data alongside these factors and the reasons to buy the EURO are few and far between.
USA: RecentlyFed member Kashkari has said “there is a risk interest rates might have to go higher” .. which explains the USD rally. EUR/USD at 1.0550 is the lowest level since March23. This afternoon’s inflation data will be closely watched – as will all data from now on. But the US has falling inflation, strong economic numbers alongside strong labour demand and robust consumer spending.
We are likely to enter a period of ‘cautious volatility’ as the market studies every data-release for signs of what the Fed will do next. Inflation is the next big one!