By Noam Bennaiche
Sterling is firmer this morning, recovering recent losses, following an upside surprise in UK GDP and a retreat in the US Dollar, despite stronger than expected US inflation and retail sales data. GBP>USD has risen to its highest level since 6th October.
UK GDP grew by 0.1% in August, defying expectations of a 0.1% contraction, following growth of 0.4% in both June and July. Production rose by 0.8%, while services stagnated and construction contracted by 0.2%. Although modest, the upside surprise reinforced expectations of tighter monetary policy, with markets pricing in a 94% probability of a 25-basis-point Bank of England rate hike to 4.00% in November. Governor Andrew Bailey acknowledged that the economy was proving more resilient than expected, while describing August’s 3.1% inflation rate as “enormously frustrating”.
The US Dollar retreated despite September’s US producer price index (PPI) rising by 1.3% month on month, more than double forecasts, and retail sales increasing by 0.8%, against expectations of 0.4%. The US Dollar Index fell by 0.45% to 101.99 as Treasury yields dropped sharply, with the 10-year yield falling by 11 basis points. Markets appear to be looking through the inflation surprise, viewing energy-driven price pressures as potentially temporary. Attention now turns to Fed Chair Warsh’s remarks ahead of the Federal Open Market Committee (FOMC) decision on 28 October. In the UK, Chancellor John Healey is due to deliver the Autumn Budget on the same day.
The Euro remains under pressure, with its near-term direction heavily influenced by US interest-rate expectations and geopolitical developments, while domestic Eurozone fundamentals offer limited support. Government bond yields are rising across many countries, making it increasingly difficult for major developed economies to stabilise their debt burdens. Countries including France, the US and the UK face growing fiscal challenges. Rising yields have also been attributed to higher oil prices stemming from the war in the Middle East and the unwinding of the Yen carry trade.
UK CPI for September, due on 21 October, will be the final major data release ahead of the Bank of England’s November decision. With a rate hike largely priced in, only a significant downside surprise in inflation is likely to materially alter market expectations. The Federal Reserve meets on 28th October, with interest rates expected to remain within the 3.75%-4.00% range.
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Friday, 16th October — Key Events
EUR – Final Core CPI
IMF meeting – Day 5
Key dates ahead:
UK CPI 21st October
US Fed Policy Decision 28th October
UK Autumn Budget 28th October
UK BoE Policy Decision 5th November