Sterling’s Surge, Euro’s Insights, and USD’s Week Ahead
GBP
Pound Sterling capitalised on the optimistic statements from Bank of England policy makers during their parliamentary hearings on the November Monetary Policy Report this Tuesday. Bolstered by positive November PMI readings, indicating a return to economic growth after months of stagnation, Sterling made significant gains against most G10 peers. The fiscal landscape also played a role, with the UK government unveiling plans to inject £20bn into the economy, a move in contrast to countries like Germany, hindered by constitutional court constraints.
BoE Governor Andrew Bailey, discussing the interest rate outlook, stated that “risks are on the upside.” He also highlighted that “markets underestimate the risk of inflation persistence.” These remarks have led investors to anticipate only 40-50 basis points of Bank of England (BoE) easing next year, a notably lower expectation compared to the Fed or ECB.
This week, the UK’s data calendar is relatively quiet. BoE Governor Bailey is expected to deliver brief remarks at an event commemorating the 50th anniversary of the London Foreign Exchange Joint Standing Committee on Wednesday. Additionally, geopolitical developments will be on the radar as a temporary truce between Hamas and Israel unfolds.
EUR
The Pound to Euro exchange rate recorded its most significant weekly gain since August last week, potentially signalling a new uptrend. Strong UK preliminary business PMI data drove Sterling up by one percent against the Euro, with GBP|EUR currently at 1.1530.
Looking at the eurozone, the spotlight this week is on the release of flash CPI for November on Thursday. Further disinflation is anticipated in both headline and core readings, potentially bringing year-on-year rates back to 2.7% and 3.9%, respectively. These figures might align with the 70 basis points of European Central Bank (ECB) easing priced into eurozone money markets for the coming year.
Investor attention will also be on fiscal developments in Germany, although uncertainties persist regarding a political solution. This uncertainty may contribute to the perception of a sluggish eurozone economy in early 2024.
USD
Sterling continued its ascent against the Dollar this week, with GBP|USD reaching a two-month high just above 1.26. Strong UK preliminary business PMI data, indicating the services sector’s return to expansion in November, played a role in this upward momentum.
Despite upbeat US weekly Initial Jobless Claims data, markets maintained almost a 50% chance of a May Fed rate cut.
On the data front, the week kicks off with mid-tier New Home Sales data from the United States on Monday, followed by high-impact US Conference Board (CB) Consumer Confidence data on Tuesday. Fed policymakers will take centre stage on Tuesday, with their commentary closely watched for insights into the market’s expectations of Fed interest rates. Wednesday will feature the second estimate of the United States’ third-quarter GDP release alongside a couple of minor data publications.
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