Rising pound and declining dollar – Sterling Update

GBP 

It has been another solid week for the UK, with the pound surging to new 2-month highs against the wilting dollar. Rishi Sunak and his government continue to make the right noises, with this week even seeing apparent progress on the much-fretted Northern Ireland protocol. Pictures of a smiling Ursula Von der Leyen sat next to Rishi Sunak as they discussed NI at COP27, at least confirmed that they get on, which is a great place to start.  

UK economic data has not quite justified Rishi’s smiles, with the latest Halifax House price data slipping 0.4% (MoM/Oct) and taking the yearly figure to an increase of 8.3% versus 9.8% in the previous month. Clearly those BoE rate hikes are starting to negatively impact the outlook for the UK property market, and further declines look probable, given those big increases in mortgage rates across the board, notwithstanding the efforts by the BoE’s Bailey to bring down yields at the long-end of the curve.  

The broader growth picture comes into play today, with the latest UK GDP report. Last month, the UK narrowly avoided negative growth (up 0.2%), but this month, the latest estimates point toward a sharp decline of around 0.4%, which if proven, will highlight the tricky challenge ahead for the BoE. Whilst they would like to continue hiking rates until there is a material decline in inflation, that task becomes ever more challenging once a recession kicks in, and the chances of that are high in the UK given the obvious slowdown in economic activity.  

Looking ahead, next week is key for the UK, with the latest Retail Sales, Employment and inflation data scheduled for release. Headline inflation is currently expected to increase from 10.1% (YoY) to about 10.3%. As we said at the top, it has been a good week for the pound too, with GBP/USD moving back over 1.1700 for the first time since early September, and GBP/EUR bouncing back over 1.1500, having slipped below 1.1400 earlier in the week.   

EUR 

Other than the US inflation data (see USD), there was also some better news for markets to digest out of Europe this week, after the latest German Industrial Production (IP) data had a surprising burst to the upside. IP unexpectedly increased by 0.6% (MoM), comfortably beating estimates of an 0.2% increase. Interestingly enough, production in ‘energy-intensive’ industrial branches actually declined by 0.9% throughout September. Despite the good headline, Destatis*, did warn that the ‘extreme shortage’ of intermediate products and supply-chain logistics was still a headwind on IP. 

There was also some better news to be had on the Retail Sales front, with Euro area Retail Sales increasing by 0.4% through September, up from a flat reading previously, and helping to reduce the yearly decline from -1.4% to -0.6%. Amongst the data, there were some strong monthly gains for food, drinks and tobacco components, with a sharp drop in fuel sales throughout the region. Amongst the member states, Austria had the best month, with sales increasing by nearly 4%.  

The news will bring some comfort to Christine Lagarde and the rest of the ECB, who face the tricky challenge of making further bold rate hikes, despite weakening economies throughout the region. Indeed, ECB head Lagarde highlighted again this week the need for the ECB to continue to raise Euro area rates, even if there has been an increased probability of a recession. Lagarde said that ‘We are determined to do what is necessary to bring inflation back to our 2% target.’ Euro area inflation is currently above 10%. Talking of inflation, today sees the release of the latest German Harmonized CPI, which is expected to have remained steady at around 11.6% (YoY/Oct). Next week will be all about regional inflation and growth.  

As for the fate of the single currency, well EUR/USD has now clearly broken back above the 1.0200 resistance region, which had previously capped the topside for the Euro against the greenback since the summer. This gives strong support to the theory that the single currency might be making a more sustained recovery against the recently-beleaguered greenback, with a strengthening currency also lending a supporting hand to the ECB’s battle against surging inflation.  

*Destatis are the German federal statistic authority 

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