The Weekly Round-up

UK GDP came in stronger than expected at 0.6% (up from -0.6% last month) which saw the Pound start this week off on the front foot against, most notably, the USD. This strength was then reinforced on Tuesday following US CPI inflation data. The large Interest rate hikes that the Federal Reserve have been employing in their combat against inflation appears to be beginning to slow the market down with inflation falling to 7.1% (expected to come in at 7.6%). This helped push the GBP up further against the USD, reaching highs not seen since June of this year as investors pulled their money out of the slowing US economy. The Fed now has a series of very difficult situations to decipher. With a stuttering economy posting increasingly worrying data (for example the Empire State Manufacturing Index coming in at -11.2 expected to come out at -1.1) they are, of course very wary of tightening the economy too much (through continued interest rate hikes) However, with inflation still far above the target of 2% they risk spiralling inflation in the new year should they begin slowing down their hikes too soon.

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Although domestically the US will probably see conditions continue to worsen well into the new year. Internationally, the saving grace for the US comes in the form of the rest of the world and their own issues with combatting the ever increasingly difficult conditions. The UK saw inflation begin to fall back??down with CPI coming out at 10.7% (expected to come out at 10.9% and down from 11.1% last month) which led to the BoE opting for a 50bp hike themselves, following the Americans decision the day before. I will say that although Inflation is beginning to fall, as outlined through UK CPI data, the BOE and more specifically Andrew Bailey came under a lot of fire during the early parts of this global economic downturn, for their failure to act quicker when combatting inflation. Therefore, I worry that the switch back to 50bp may be premature. Especially as there is no denying that the US is, considerably, further along the road in their respective fight against inflation. Mostly owing to the fact that they were faster out of the blocks than the BOE when raising rates. Tomorrows PMI and retails sales data tomorrow will give us an idea as to whether Bailey and Co. were right to begin slowing down their hikes.?

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In the Eurozone we saw the ECB follow suit with a 50bp. This came as no surprise as it has generally been their preference to go with 50bp or lower, rather than the 75bp employed by the UK and the US. Christine Lagarde did however give a very hawkish speech following their decision, stating that inflation was still far above their target rate and these hikes would continue with the base rate still needing to be raised significantly. These comments saw the EUR gain ground on the Sterling with the GBP/EUR dropping over 0.5% in the hour that followed. She also stated that they expect GDP to be around 0.5% revised from 0.9% and reiterated that she believes the recession will be “short and shallow”. This will do little to encourage investors but does show once again that the Eurozone is in the same predicament as the UK and US. Central Banks seemingly have a tough year ahead as they try to combat tightening conditions whilst also bringing down inflation. All this means I believe the markets will continue to be extremely volatile into the new year, with a virtual tug of war between the major currencies as data comes out and props up one against the other.?