Will the BoE on interest rate hikes leave the pound vulnerable?
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GBP:EUR
The pound is expected to remain resilient against the euro. The tax cuts announced by the Treasury are positive for the Sterling as they will support growth. The currency pair has also strengthened after the release of upbeat UK PMI data. UK composite PMI rose unexpectedly in November, climbing to 50.1 in November, while the Manufacturing PMI reached 46.7 from 44.8 previously. The Services PMI rose to 50.5 from 49.5 in the previous reading. November’s preliminary PMI figures showed a greater-than-expected rise, which has improved the UK’s economic outlook.
The Bank of England (BoE) Governor Andrew Bailey said that it is too early to think about rate cuts and that borrowing costs may rise again if inflation continues to persist. The higher for longer rate narrative from the BoE has helped support the GBP.
Investors will closely watch German growth numbers for the third quarter and the IFO Survey for further clues about the pair’s direction. The quarterly and annual German GDP for Q3 is forecast to come in at -0.1% and -0.3%, respectively. Speeches, later on in the day from the European Central Bank (ECB) President Christine Lagarde and ECB Vice President Luis De Guindos are not expected to create any surprises.
On Thursday, the Eurozone Manufacturing Purchasing Managers Index rose to 43.8 in November, compared with the consensus of 43.4 and the previous reading of 43.1. This was the highest number in six months. The Eurozone’s Services PMI hit a two-month high, but investors suggest that November’s PMI data did not indicate that Eurozone GDP growth would improve in the fourth quarter and the region may have entered a technical recession in 2023. This has weighed on the euro.
In terms of economic data, we note the following: On Wednesday, we have Preliminary HICP rate for November from Germany. On Thursday, we get the Nationwide house prices for November from the UK, the final GDP rate for Q3 and preliminary HICP rates for November from France, and the preliminary HICP rates for November from the Eurozone.
Expected Volatility – Medium
If BoE policymakers continue being hawkish, then the pound will find support. Further government comments on tax-cuts or an expansionary fiscal policy will strengthen the pound. The Eurozone’s preliminary HICP rates for November will be crucial.
The USD was mostly stable against other currencies with a slight bearish tilt for the week. The Federal Reserve’s meeting minutes revealed a hawkish stance, favouring a restrictive policy despite market expectations leaning towards a quicker rate cut in the coming year. This led to a shift in market pricing, delaying the anticipated rate cut from May to possibly June. Additionally, comments from Fed policymakers regarding the need for more evidence to confirm easing inflation could impact the USD. On the macroeconomic front, there was a decline in existing home sales, signalling potential contraction in the real estate sector, while the growth rate of durable goods orders fell more than anticipated, suggesting caution among US businesses to invest domestically. However, the weekly initial jobless claims decreased more than expected, indicating tightness in the US job market, which provided some support for the USD.
In terms of US economic data, we note the following:
On Tuesday, we have the release of consumer confidence for November. On Wednesday, we draw attention to the revised US GDP rate for Q3. On Thursday, we note the release of the consumption rate and the Core PCE price index for October, and, finally, the weekly initial jobless claims figure.
Expected Volatility – Medium
Apart from the GDP rate, any commentary from Fed policymakers repeating the need for more data to support easing inflationary pressures, will help boost the greenback.
EUR:USD
The Euro remains bullish against the US dollar and builds on Thursday’s gains. In the foreign exchange market, volatility is expected to remain at low levels following the US Thanksgiving Day holiday on Thursday and Friday’s shortened trading session. The US dollar recovered earlier in the week despite expectations of a potential interest rate cut by the Federal Reserve (Fed) at some point in the spring of 2024. On the European docket, the German economy shrank 0.1% QoQ and 0.4% in the last twelve months according to the final GDP growth rate figures. The IFO institute reported that the Business Climate index improved to 87.3 in November. Moving on to the European Central Bank (ECB), its President Christine Lagarde mentioned that considerable actions had already been taken regarding interest rates and that the situation could now be monitored.
Expected Volatility – Medium
Commentary from ECB and Fed policymakers to influence the pair. France’s final GDP rate for Q3 and November’s preliminary HICP rates will be key. If the rates do not slow down, then the euro could strengthen.
Japanese Yen (JPY)
The Japanese yen could strengthen in the coming week if Bank of Japan (BoJ) policymakers comment on policy normalisation. Monetary discussions suggest a potential end to the Bank of Japan’s negative rate policy by 2024, with increased expectations for the bank’s first rate hike in spring next year, possibly during the January meeting. Japan’s recent CPI acceleration in October is supportive of a shift in monetary policy due to the persistence of inflationary pressures. However, the preliminary PMI figures for November show that economic activity has weakened in the manufacturing sector, increasing concerns about Japan’s economic outlook. In the coming week, we note the release of Japan’s preliminary industrial output for October on Thursday.
Australian Dollar (AUD)
On the monetary front, the Reserve Bank of Australia (RBA) has expressed concerns about inflationary pressures which indicates the possibility for another rate hike or at least reinforces the bank’s hawkish tone. Market expectations suggest another rate hike by the bank in early Spring next year, and any further hawkish commentary will support the Aussie. If market sentiment is positive, then the Aussie will strengthen and vice versa. News about the Chinese economy, given the close trading relationship with Australia, is important. Reports that China is preparing economic packages to assist its property developers may support economic growth in China and boost the Australian dollar. In terms of economic data, we note Tuesday’s October retail sales and Thursday’s building approvals for October, as well as CapEx rates for Q3. From China, we highlight Thursday’s release of the NBS PMI figures for November and, the Caixin manufacturing PMI figure for November due out on Friday.
Canadian Dollar (CAD)
The Bank of Canada’s (BoC) more dovish tone has weighed on the CAD. BoC Governor Tiff Macklem indicated an end to rate hikes, suggesting that current interest rates might be sufficiently restrictive to achieve price stability. Market participants expect a potential rate cut by the bank in April.
In terms of oil prices, if they rise in the upcoming week, then the Canadian dollar could strengthen since Canada is a major oil-producing economy. Additionally, a positive market sentiment will offer further support.
On Thursday, we note the release of the Business Barometer for November and GDP rate for Q3. If there is another contraction in GDP, then the Loonie could weaken. Friday’s release of November’s employment data is also important, and if it shows the employment market remains tight, then the Loonie will gain more support.