The Pound Sterling News
The first half of February saw the Pound drop to a 4-month low against the Euro on the 5th February, a 4-week low against the US Dollar on the 7th February and its lowest level against the Aussie Dollar on the 2nd February since last September before recovering to register a February high against the Euro on Friday.
In the last fortnight we have seen a real mixture of economic and political factors impacting the Pound including: –
- UK mortgage lending is expected to grow at just 0.4% in 2023, the slowest rate since 2011.
- The Nationwide revealed that UK house prices are now on their worst streak since the financial crisis of 2009. Falling for a fifth month in a row in January.
- The International Monetary Fund (IMF) cut its estimate for the growth forecast for the UK economy again. It now expects the UK to be the only major economy to see a fall in output this year. It also predicts only a moderate improvement in 2024.
- British grocery inflation hit a record 16.7% in the four weeks to 22 January. Market researcher Kantar said “Grocery inflation was at its highest since it started tracking the figure in 2008.”
- As predicted, the Bank of England (BoE) raised UK interest rates for the 10th consecutive meeting on the 2nd of February. The Bank’s Monetary Policy Committee (MPC) raised rates by another 0.5% to 4%. It puts UK interest rates at their highest level since October 2008.
- However, financial markets reacted by further scaling back their expectations on the outlook for UK interest rates. The interest rate markets are now pricing in an 80% probability of a further 0.35% interest rate increase by mid-year but also see an 80% chance of interest rate cuts across the fourth quarter of 2023.
- More political turmoil with Nadhim Zahawi sacked as Tory Party Chair followed by a limited Cabinet reshuffle.
However, There Is Also Some More Positive News:
- The Lloyds Business Barometer survey for January showed overall business confidence started the New Year on a positive note. Rising for a second month in a row. Headline business confidence rose to 22%, its first back-to-back increase since September 2021 the highest level for six months. The upturn was again driven by a more optimistic assessment of the wider economy.
- Confidence in the state of the UK economy has also rebounded in its biggest sector. Executives working in the UK’s services sector. This accounts for over 75% of the entire UK economy. Who are now significantly more confident about the state of the British economy than they were in middle of 2022. The sector leaders’ confidence in the UK economy has increased from 43% in September 2022 to 71% in January 2023.
- The FTSE 100 index in London has hit its second record high in four days last week as traders react to hints from various monetary officials alluding to the possibility that interest rate rises could soon ease.
- Last Friday saw better than expected UK GDP (economic growth) data as the UK economy avoided slipping into recession in December 2022.
This week sees the next batch of UK economic data releases with unemployment and wages data out tomorrow, inflation data out on Wednesday and retails sales data out on Friday. All will be closely watched by the markets for signals of what the Bank of England may do when it next meets on the 23rd of March.
The Eurozone inflation rate slowed to 8.5% on back of lower energy costs, its lowest level since May 2022.
Despite the slowdown, the European Central Bank (ECB) raised interest rates for a fifth policy meeting in a row, this time by 0.5%, resulting in a total increase in rates to 3% since July 2022.
Further increases are expected, albeit at a slower pace. Whilst the rate of increase in eurozone inflation has slowed, it’s still running well above its official 2% target.
We have the latest EU GDP data out tomorrow. The ECB next meet on the 16th of March.
US Dollar News
The US Federal Reserve raised its policy interest rate again on the 1st of February by 0.25%, their second successive reduction in the pace of their rate increases and signalled the likelihood of further interest rate rises as the Federal Reserve Chair Jay Powell continued to push back against market expectations that rates will be cut in the second half of 2023.
This latest increase in rates was once again unanimous and is the Fed’s eighth successive rate increase. It takes the Fed Funds rate band up to 4.50%-4.75% and means that rates have now risen by 4.5% in total since the Fed started to act after US inflation hit a 41-year high last year. The latest 0.25% increase is the Fed’s smallest since March 2022 and represents a slowdown from December’s 0.5% rate increase and the four previous monthly increases of 0.75%.
The US unemployment rate has since fallen to hit a 53-year low. Tomorrow sees the publication of the latest US inflation data with retails sales and industrial production data on Wednesday and employment and housing starts data on Thursday.
The next Federal Reserve interest rate setting meeting is due on the 22nd of March.
This week is going to be another busy one in the markets. With plenty of economic data releases from major economies including the UK, USA and the EU. Giving the markets another steer as to what the big three central banks will do when they next meet in March.
March will also see the UK budget announced on the 15th of the month.
The economic debate in the UK also seems to have shifted after former Prime Minister Liz Truss, published a lengthy article and appeared in a TV interview. Something that has not happened since she was ousted from No. 10 becoming the shortest reigning PM in British history.
The next big political test for the Pound will come on the 4th of May with the local elections.
In the meantime, expect more volatility.
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