Can The Pound Recover From A Dreadful Few Weeks?

Currency Exchange Rates Update

The Pound has had a dreadful couple of weeks, losing ground against all of its major currency peers and touching an 18-week low against the Euro and a 26-week low against the US Dollar last week.

What’s In The News?

In The UK...

Good news

Good news for mortgage payers and borrowers (but terrible news for the Pound). The Bank of England (BoE) left interest rates on hold last week. The decision was made by the slimmest margin. Only five of the nine-strong rate-setting Monetary Policy Committee (MPC) backed a hold. The other four members voted for the expected 0.25% rate increase. It is the first time since November 2022 that interest rates were left unchanged.

The day before the latest BoE interest rate decision, the ONS (Office for National Statistics) reported that the headline rate of inflation has dropped to an 18-month low.

The Consumer Price Index (CPI) came in at 6.7% in August. Marginally down from the 6.8% in July. But much lower than the 7% expected by most economists and the 7.1% rate forecast by the BoE. With grocery price inflation dropping to its lowest level in over a year. It is the sixth consecutive month that the rate of increase slowed according to the latest data from Kantar. Good news for shoppers (but bad news for the Pound).

The latest UK Public Finance figures have given Chancellor Jeremy Hunt a bit of wiggle room for pre-election giveaways. Although Hunt has ruled out tax cuts in his Autumn Statement scheduled for the 22nd November but may have room for tax cuts in the Budget due in March 2024.

The ONS reported UK exports to the EU increased in July by ￡500m.

BMW announced plans to build its next-generation electric Mini in the UK.

The multi-million-pound investment will transform its existing plant in Oxford and secure 4,000 high-quality jobs.

The announcement is the latest boost for the British car industry. With figures last month suggesting production increased by almost a third compared to a year ago.

Last week, electric vehicle production also began at the Stellantis’s factory in Ellesmere Port.

Trade association @MakeUK reported that the UK has leapfrogged France to become the 8th largest manufacturer in the world. With an annual output of ￡224 billion. The sector now supports 2.6 million jobs.

UK Finance reported that the use of cash has risen for the first time in a decade. Cash was used to make 6.4bn payments in 2022. That’s up 7% on the prior year and accounting for 14% of all transactions. This halts years of steep declines in the use of cash.

The ONS reported that the three-month change in employment eased further in July. There was also a further decline in the number of job vacancies. This is the first time it’s fallen below 1m since July 2021. The unemployment rate rose from 4.2% to 4.3%. With average earnings in the public sector up 12.2% in the last three months. And private sector pay was up by 7.6%.

Property website Rightmove reported that home sellers are cutting asking prices at the highest rate in 12 years as mortgage rates hit buyer demand with more than a third of homes had prices cut at least once in the four weeks to September 9, the largest share since January 2011.

Across the entire housing market, the average asking price in August showed the biggest year-on-year fall since March 2019.

The ONS reported that retail sales rebounded in August. Sales volumes rising by 0.4%, a sharp reversal after a fall of 1.1% in July.

Not so good news

The ONS reported that the UK economy contracted by 0.5% in July. With all sectors of the economy starting to come under pressure from the BoE’s interest rate hikes. Economists had predicted a smaller fall of 0.2%, again heaping pressure on the value of the Pound against its currency peers.

Darren Morgan, Director of economic statistics at the ONS said “In July, industrial action by healthcare workers and teachers negatively impacted services and it was a weaker month for construction and retail due to the poor weather.”

According to the BoE, the value of mortgages in arrears has climbed to its highest level since 2016. Mainly as rising interest rates bite.

In the USA…

Last week, the Fed left its interest rate unchanged at 5.25% to 5.50%. They want the markets to believe that US interest rates will stay “higher for longer”.

The recent weakness of Gross Domestic Income (GDI) paints a much weaker picture of recent US economic performance than the GDP figure. As the GDI data has historically provided the more accurate steer to true economic conditions, there is a risk that GDP is currently overstating the health of the US economy. GDP has risen for the past 12 months and is 2.5% higher than a year ago. Whereas GDI has contracted in two of the past four quarters and is 0.5% lower than a year ago.

The US budget deficit now surpasses $1.6 trillion over the first 10 months of this fiscal year. Far higher than forecast earlier in the year and is running near 8% of GDP on a quarterly basis.

Mortgage demand has stalled at a level not seen since 1996. With applications for mortgages to purchase a home running 27% lower than the same week one year ago.

In The EU…

Two weeks ago, the ECB (European Central Bank) increased the EU interest rate by a further 0.25% to a record 4% level. Whilst hinting at a possible peak. ?

The ECB also cut its GDP growth forecast. And now sees the EU economy flat-lining in the second half of this year.

Euro-zone industrial production fell in July and is forecast to continue to do so over the remainder of the year in the face of weakening demand.

Peter Oppenheimer, chief global equity strategist and head of macro research EMEA at Goldman Sachs told CNBC that recession-hit Germany is facing a flurry of global headwinds including challenges in the manufacturing sector; a disappointing China reopening boost and higher energy costs as contributing to the ongoing recession in Europe’s largest economy.

Christian Sewing, the Deutsche Bank CEO said in his keynote address at the Handelsblatt Banking Summit 2023 that Germany will become the sick man of Europe without change.

Germany is predicted to be the only major European economy to contract this year as recession lingers.

Germany’s Finance Minister Christian Lindner has blasted the EU over their ‘enormously dangerous’ green plans warning that a Brussels push to make buildings across the bloc more energy-efficient would threaten ‘social peace.’ Lindner also argued that Europeans are suffering from overregulation or “red tape all over the place.”

This could see the Euro lose further ground against the Dollar and also retreat and give up its recent gains against the Pound.

Others

Shipping giant Maersk is seeing tentative signs of a bounce back in global trade according to its CEO. Vincent Clerc told CNBC “Barring any negative surprises, we would hope for a slow pickup as we get into 2024, a pickup that will not be a boom like what we have known in the past few years, but certainly … a demand that is a bit more in line with what we see in terms of consumption, and not so much an inventory correction”.

Oil prices are closing in on $100 per barrel after swingeing cuts from OPEC and its allies in OPEC+ after both Russia and Saudi Arabia extend their pledged output cuts. Oil prices have risen to their highest levels since November 2022.

Chinese President Xi Jinping’s leadership is raising questions after he fired several top officials including the mysterious purge of his foreign minister in July, followed by the reported ousting of his defence chief less than two months later. The upheaval is leaving international investors and foreign governments spooked and is undercutting Beijing’s efforts to convince the private sector it’s safe to invest in China.

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Quote

This week’s quote is from Dr Seuss

“Sometimes the questions are complicated, and the answers are simple.”