Post-Covid-19 Budget Forecasts Higher Growth And Inflation Rates Ahead Of Bank Of England (BoE) Meeting

Sterling remained well supported last week following Chancellor Sunak’s Autumn Budget Report. UK taxes are reportedly heading for the highest level since 1950 and the Conservative Government plans to increase public spending by £150 billion and head into the next election between 2024-25 with spending accounting for 2.5% more for the economy than in 2019-20’s. The Chancellor’s post-Covid Budget Report included official forecasts showing that the economy had recovered more quickly than expected with a growth of 6.5% this year. The Budget Report included major revisions to inflation forecasts with the Office for Budget Responsibility (OBR) forecasting the Consumer Prices Index (CPI) inflation to peak at 4.4% next spring.

Attention this week turns to the Bank of England Monetary Policy (BoE MPC) meeting as investors seek guidance on the bank’s forecasted lifting of interest rates and reduction of its bond buying programme. The base rate is at a historic low of 0.1% where it has remained since the BoE made two emergency cuts at the onset of the pandemic in March 2020. Following recent hawkish comments from members of the BoE, many economists are predicting a 15 basis point (bp) rate hike. It’s expected that at least one known dove, Silvana Tenreyro is likely to oppose voting for a rise. A non-unanimous vote may be seen as a warning sign that any future hiking series of decision may not command the same levels of support.

Dollar Strengthens As Focus Shifts To This Week’s FOMC Meeting

Last week’s economic calendar highlight was the release of Q3 Gross Domestic Product (GDP) which saw the US economy expand by 2% on an annualised basis. The reading was below expectations for a 2.7% rise, according to data from the commerce department on Thursday. On Wednesday, September’s US Durable Goods Orders (DGO) reading was reported as better than expected but showed a contraction as concerns around rising inflation, supply chain issues and a slowdown in the economy continued to weight in on risk appetite. Meanwhile, data on Wednesday also showed the US international trade deficit expanded to $96.3 billion in September. The US 10-Year Treasury’s yields fell as investors look to the next move from the Federal Reserve (Fed) with the US Dollar ending the day weaker against most major currencies. The US Dollar lost ground against the Canadian Dollar as various central banks indicated towards a tightening on monetary policy. The Canadian Dollar rallied against the US Dollar as the Bank of Canada announced it will end its weekly purchases of government bonds, the first central bank to formally end its pandemic related stimulus. The US Dollar ended the week stronger, supported by a combination of month-end flows, portfolio rebalancing and the moistest risk of appetite across financial markets.

With November’s Federal Open Market Committee (FOMC) meeting around the corner, the US Dollar ended well supported last week. Expectations of a hawkish turn by the Fed this week may keep it well supported as the Fed is expected to announce the end of its monetary policy stimulus. On the economic calendar the updated Institute for Supply Management (ISM) Manufacturing Data is likely to draw attention ahead of the Fed announcement.

The European Central Bank (ECB) Voted To Keep Rates On Hold

The main event across the EU last week saw the ECB vote to keep interest rates on hold at their October meeting in line with market expectations. The ECB’s main refinancing rate remained at 0% whilst rates on the marginal lending facility and deposit facility remain at 0.25% and -0.5% respectively. It was also confirmed that the pace of the European Pandemic Emergency Purchasing Programme (PEPP) will be “moderately slower” than the previous two quarters at €1.85 trillion. During the associated press conference, Christine Lagarde also hinted that the PEPP will start to wind down in March 2022. Following the announcement and press conference, volatility surrounding the Euro increased to the upside. Eurozone GDP is forecast to show a 2% increase in output during Q3. In addition, we also have Eurozone inflation projected to show a rise of 3.7% in October from a previous reading of 3.4%.

On Friday, French President Emmanuel Macron warned Boris Johnson that the international reputation of the UK is in the spotlight concerning Brexit disputes on fishing rights over Northern Ireland. Tensions remain between the EU and UK as both sides struggle to resolve disputes over the Northern Ireland protocol that was agreed to cover post-Brexit trade.

Without a Central Bank vote this week, investors will turn to the final manufacturing data on Tuesday and the updated unemployment figures on Wednesday.

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