The past week has seen some of the usual ‘festive’ volatility creep into the markets, mainly fuelled by a conflict of data vs political commentary.
The Bank of England maintained its current interest rates for the third consecutive meeting last week, emphasizsing its commitment to keeping borrowing costs stable at 5.25%. In contrast to the Federal Reserve, which strongly suggested at its recent meeting that it is gearing up for several cuts in US interest rates next year, the Bank of England signalled that such a move is not imminent in the UK. Andrew Bailey, the governor of the Bank of England, stated, "I believe it's premature to begin speculating about reducing interest rates at this point; we need to observe further progress."
The market interpreted this as the UK likely to hold a higher interest rate for longest period out of the G10 currencies, and the pound strengthened immediately, moving from 1.26 to 1.2760 against the dollar and rising to 1.1680 from 1.1540 against the Euro.
Despite the BOE stance on interest rates, inflation figures this week showed a bigger than expected fall to 3.9% in November, down from 4.6% in October. Inflation is now at its lowest since September 2021 and markets now believe that the BOE could deliver at least four interest rate cuts in 2024.
As soon as the news hit the pound reversed its previous gains and moved down to around 1.2650 against the dollar and 1.1560 against the Euro.
Concerns about a recession may resurface in the British economy, as there is a possibility of revised GDP estimates tomorrow that could dispel earlier hopes of avoiding a contraction. Although the initial assessments of the UK's gross domestic product for the three months ending in September indicated zero growth, subsequent data revealed weaker-than-anticipated retail sales. This alone could be sufficient to reduce growth by a few tenths of a percentage point.
Jeremy Hunt has provided a post-Brexit boost to the City by reaching a trade agreement with Switzerland. The Treasury revealed on Wednesday a new financial services deal that will cut costs for UK businesses seeking access to the Swiss market, and vice versa. The agreement between the UK and Switzerland is set to be signed in Bern on Thursday by Jeremy Hunt and Karin Keller-Sutter, who heads Switzerland's federal department of finance. This development is an additional positive step for the City as Jeremy Hunt takes measures to reduce bureaucratic hurdles, aiming to enhance the competitiveness of Britain's financial services sector post-Brexit.
The dovish turn by the Federal Reserve in December has strengthened the argument for the declining dollar to continue its slide into 2024, although the resilience of the U.S. economy may constrain the extent of the greenback's decrease. After reaching a two-decade high following the Fed's rate hikes in 2022, the U.S. currency has mostly traded within a range this year due to robust U.S. economic growth and the central bank's commitment to maintaining elevated borrowing costs. The unexpected shift in last week's Fed meeting came as Chairman Jerome Powell indicated that the historic tightening of monetary policy, which had pushed rates to decades-high levels, was likely concluding, given the moderation in inflation. Policymakers now anticipate a reduction of 75 basis points in the coming year.
The dollar received some backing this week, although it came from lower-than-anticipated inflation reports in Germany and the UK, leading to a decrease in European government bond yields and a relative weakening of the euro against the dollar. The dollar's ascent gained momentum with robust U.S. existing home sales and consumer confidence reports surpassing expectations. Furthermore, the dollar's advances continued into Wednesday afternoon as stock prices declined, heightening demand for liquidity and strengthening the dollar. EURUSD currently resides around 1.0940.
** We are closed on 25th/26th December, and 1st January 2024, but open as normal otherwise. So from everybody at IFX Payments we wish you all a happy and healthy festive break and a prosperous 2024.
