Image of Tony Redondo From Cosmos Currency Exchange announcing this weeks Currency Matters blog about Are Interest Rates ‘Near The Top Of The Cycle’

Are Interest Rates ‘Near The Top Of The Cycle’?

Currency Exchange Rates Update

The first half of September has seen the Pound come off its summer highs against its main rivals. Losing 1.4% against the Euro; 2.8% against the US Dollar; 2.5% against the Australian Dollar and 1.9% against the Canadian Dollar.

What’s In The News?

In The UK…

The current base rate set by the BoE (Bank of England) is 5.25%. The BoE next meet on 21st September. Before the 21st, we have the latest UK employment; wages; GDP; Industrial production and inflation data. Analysts are split on whether the BoE will raise interest rates by another 0.25% to 5.5%. This would be the 15th increase in a row. Taking UK interest rates up to a level not seen since December 2007.

BoE Governor Bailey has indicated recently that UK interest rates are “near the top of the cycle”.

Good news

The ‘Doomsayers’ have been proved wrong once again! The revised UK GDP data showing the UK has had the third fastest economic recovery from Covid of the G7 countries.

Data from the ONS (Office for National Statistics) had previously indicated the UK’s finances had suffered greatly from the impact of the Covid-19 pandemic and the Ukraine war.

However, revised figures show the UK economy was in a better position than previously thought. With gross national product (GDP) growth figures up 0.6% on pre-pandemic levels by the fourth quarter of 2021.

It means the UK at that point had the third fastest G7 recovery only behind the US and Canada.

Image showing UK Growth Over Pandemic now upgraded to third fastest in the G7

The first electric vehicles have started rolling off the production line at Stellantis’ Ellesmere Port plant. Following a £100 million investment programme that secured the site’s future and more than 1,000 jobs. Ellesmere Port is the UK’s first EV-only manufacturing plant and the first Stellantis plant globally dedicated to electric vehicles.

The British Retail Consortium (BRC) reported like-for-like nominal retail sales growth of 4.3% in the 12-months to August.

The August Lloyds Business Barometer survey also pointed to a further improvement in trading prospects for the year ahead. Showing business confidence in London at its highest since May 2022.

A ‘Bespoke’ Brexit deal has been signed off allowing the UK to rejoin the EU’s £85 bn Horizon science scheme. This follows months of negotiations.

The move was quickly welcomed by UK business leaders. John Dickie, Chief Executive of Business LDN, said: “This breakthrough will support the UK’s position at the cutting-edge of research and development. It also sends an important signal that we are willing to seize the wider network benefits that Horizon Europe offers. Alongside funding for individual projects – from being part of a world-leading consortium of scientists, researchers and businesses.”

Not So Good News

The cross-party Public Accounts Committee (PAC) said: “While most of the £21 bn of taxpayers’ money lost to fraud during the pandemic is unlikely to be recovered, the government should be doing more to recoup what it can and accused the Sunak government of “flying blind” on its exposure to fraud, which has quadrupled since the start of the Covid-19 pandemic.”

The UK has slipped from 8th to 18th out of 180 countries in 2022 for perceived corruption levels according to Transparency International.

The Halifax has reported that real house prices in the UK have slipped to a seven-year low. Whilst the Nationwide reported a fall to a 14-year low.

The PMI (Purchasing Manager’s Index) for the UK’s services sector showed a reading of 49.5 in August, down from 51.5 in July. It is the first time the index showed a negative reading since January. With any score below 50 indicating that the sector has shrunk, heightening the risk that UK could head into a recession later this year.

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey, said: “Service providers saw customer spending reverse course during August as higher borrowing costs, subdued business confidence and stretched household finances all acted to curtail sales opportunities”.

The UK government is not exploiting its North Sea fossil fuel reserves. Instead Iit’s buying 77% of its gas from Norway and is paying Norway £14 billion a year to import its fossil fuels.

The current base rate set by the Fed (Federal Reserve) is 5.5%. The next Fed meeting is on 20th September with markets now expecting the Fed to keep US interest rates unchanged.

In The USA…

The US dollar has been enjoying its longest weekly winning streak since 2014. Encouraged by a resilient run of US economic data.

US mortgage rates decreased for a second week in a row last week with the average for a 30-year, fixed loan falling to 7.12%. Mortgage rates have been above 7% for the past four weeks and have more than doubled since the start of 2022. The surge in borrowing costs has stifled home sales and sidelined many buyers.

Goldman Sachs now sees the probability of a US recession at 15%, down from the 20% previously forecast and well below a Bloomberg consensus of 60%.

Why So Optimistic?

“First, real disposable income looks set to reaccelerate in 2024 on the back of continued solid job growth and rising real wages, says Jan Hatzius, chief economist at Goldman. “Second, we still strongly disagree with the notion that a growing drag from the ‘long and variable lags’ of monetary policy will push the economy toward recession.”

Goldman Sachs says: “15% chance US will enter recession”.

In The EU…

The current base rate set by the ECB (European Central Bank) is 4.25%. On Thursday, the ECB meets and analysts think a final 0.25% rate rise is the most likely outcome.

The gloomy data releases continue with the EU construction PMI (Purchasing Managers Index) data falling to a new post-pandemic low. Suggesting that activity in that sector is slumping with the housing component falling off a cliff in recent months. This has been particularly weak in Germany.

German industrial production has fallen for the third consecutive month in July. It’s now more than 7% below pre-COVID levels. The risk of Germany falling into contraction remains high according to ING economists as retail sales and exports have also fallen for Germany.

Others

WTI crude oil price rose to a 10-month high of $87 a barrel from a recent low of less than $70 in late June. This is raising fears that the resulting rebound in consumer price inflation could force the Fed to resume raising interest rates later this year.

Analysts still expect Australia to enter a recession. Chevron LNG workers in Australia have begun partial strikes after the company and unions failed to reach an agreement on key terms. The facilities on strike account for about 7% of global LNG supply in 2022. So European natural gas prices are set to rise further.

The Bank of Canada kept interest rates unchanged at 5% last week. The Canadian dollar is expected to weaken in the coming quarters as investors anticipate a more dovish policy path for the Bank of Canada.

China economic data continues to worsen. Exports have fallen by 8.8% from a year ago whilst imports fell by 7.3% from a year ago. Exports have fallen year-on-year for every month since April. Because global demand for Chinese goods wanes with imports having now fallen every month in 2023 from the year-ago period.

THE COSMOS OFFER

Of course, currency market volatility can bring trouble but with careful monitoring can also bring opportunity.

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We are pro-active not reactive.

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Quote
This week’s quote is from Dr. Seuss

“Don’t cry because its over. Smile because it happened.”

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