Sovereign International Daily Market Report
GBP soars to two-and-a-half year highs on strong UK growth outlook
The pound has cemented its status as the best performing major currency in the world this week, as investors react to signs of a slowdown in growth elsewhere.
Highlights:
While Monday morning’s flash PMI figures out of the UK were a slight disappointment, the much better performance of Britain’s economy relative to its European counterparts has kept sterling well bid. Indeed, traders have propelled the pound to its highest level against the dollar since February 2022 this week, with the UK currency also touching two-year highs on the euro.
Market sentiment was buoyed yesterday by news of some much-needed stimulus measures out of China. The People’s Bank of China announced that it would be cutting its 7-day repo rate by 20bps, and the reserve requirement ratio by 50bps. This was accompanied by a package of support for the ailing real estate sector, and a $113bn boost in liquidity for the stock market.
Risk currencies, including the pound and indeed the euro for that matter, were given a boost by the news, while the Australian dollar, which was further supported by Tuesday’s hawkish RBA announcement, also outperformed. Focus now shifts to the US, with a dump of macroeconomic data and central bank speeches scheduled for Thursday.
USD
The US dollar traded lower against most currencies on Tuesday, as news of fresh stimulus measures out of China raised optimism on the state of the global economy, lifting risk assets across the board at the expense of the safe havens. Macroeconomic news out of the US has had relatively mixed implications for the greenback so far this week. The September PMI figures continued to point to a solid expansion in the world’s largest economy, particularly in the key services sector. But Tuesday’s consumer confidence index was a big disappointment, posting its largest one-month decline since August 2021.
The latter could be a bit of a blow to Democratic candidate Kamala Harris ahead of the upcoming election, while it also raises the risk that the Fed could follow up its jumbo September rate cut with another one in November - a 50bp rate cut is now roughly 60% priced in for the 07/11 meeting. A handful of FOMC members are on the docket to speak on Thursday, including chair Jerome Powell. Expect heightened volatility in the dollar in the coming days should officials attempt to steer the market in one direction or the other.
EUR
As mentioned in Monday’s G10 weekly report, this week’s Euro Area PMI figures were nothing short of a disaster, raising fears over the possibility of a stagnation in the bloc’s economy in Q3, while heightening bets in favour of a more aggressive pace of cuts from the ECB. Governor Council member Madis Muller warned yesterday that at October cut was possible, and markets are now almost fully pricing in 50 basis points of cuts by year-end. While we think that this is slightly excessive, clearly the risk of back-to-back cuts is rising, particularly should upcoming data continue to point to a slowdown in growth ahead.
Communications from ECB members will be front and centre in the coming days, including from president Lagarde on Thursday. While we don’t think that officials will have yet made their mind up about an October cut, any hint of increased dovishness in their remarks could bring another rate reduction next month into closer view, which may present a downside risk to the euro in the coming days.
GBP
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Sterling has continued to go from strength to strength, trading just above the dollar this morning, while hitting fresh post-Brexit vote highs in trade-weighted terms. The September PMIs were mildly underwhelming, although with the composite index still sitting pretty, investors are confident that another solid period of growth in the UK economy is on the way once the third quarter GDP figures are released later this year.
With no major UK data to be released during the remainder of the week, focus among market participants will be squarely on communications from Bank of England committee members, particularly at Thursday’s Monetary Policy Report hearings. We suspect that officials will again stress a gradual approach to lower rates, with rhetoric that is consistent with cuts on no more than a quarterly basis.
Economic Calendar (25/09/2024-27/09/2024)
Wednesday (25.09)
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Friday (27.09)
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