Andrew Bailey has underscored the challenging road ahead in returning inflation to the 2% target. He emphasized that there is currently no immediate likelihood of the Bank of England reducing interest rates, countering speculations in financial markets about an imminent decrease from the existing 5.25% level. This marks the third occasion within a week that Threadneedle Street's governor has dispelled notions of potential rate cuts.
Rishi Sunak announced a commitment of £29.5 billion in new investments, characterizing it as a substantial vote of confidence in the UK economy. The recent Autumn Statement introduced measures to stimulate business investment, but these initiatives unfolded against a backdrop of diminished growth forecasts. Nissan's revelation of plans to construct three electric car models in its Sunderland factory as part of a £2 billion investment scheme, potentially safeguarding up to 6,000 UK jobs, provided a positive development.
Deutsche Bank economists projected on Monday that the Federal Reserve will implement more aggressive rate cuts than what current market expectations suggest, foreseeing a mild U.S. recession in the first half of the upcoming year. Their outlook report anticipates 175 basis points in rate cuts by 2024. U.S. stock futures defended modest gains despite a renewed sell-off in U.S. Treasury bond yields and the U.S. Dollar. This market response followed a dovish shift from Fed Governor Christopher Waller, traditionally seen as a hawk. Waller's comments heightened expectations of Fed rate cuts for the next year, particularly as he stated on Tuesday, "if the decline in inflation continues for several more months... three months, four months, five months... we could start lowering the policy rate just because inflation is lower."
Christine Lagarde, President of the European Central Bank (ECB), informed the European Parliament on Monday that economic activity in the eurozone has stagnated in recent quarters and is anticipated to remain feeble throughout the rest of the year. Lagarde attributed the slight contraction of the Eurozone's real gross domestic product (GDP) in the third quarter to various factors, including the expanding impact of higher interest rates, feeble foreign demand, and the diminishing momentum from the economy's reopening after the pandemic.
Yesterday, German inflation figures for November declined more than anticipated, reaching 2.3 percent, prompting speculation about the potential need for the European Central Bank to contemplate a reduction in interest rates. This outcome, reminiscent of a parallel shortfall in Spanish inflation compared to earlier predictions on Wednesday, suggests that when the eurozone inflation data is disclosed on Thursday, it is likely to register below the anticipated levels.
The news from the BOE regarding longer term high interest rates coupled with the FED news of aggressive rate cuts have seen the dollar weaken, and the pound gain across the board. Around 2 weeks ago GBPUSD resided at around 1.22 but currently sits around 1.2650. Yesterdays Eurozone data regarding inflation has seen EURUSD weaken slightly from 1.10 to 1.0920, whilst GBPEUR has pushed up to around 1.16.
