Sterling had a torrid time of late, breaching the lows against the US dollar since 1985. Sterling was on the back foot since Thursday following the 50 basis point move from the central bank; disappointing markets.
On Friday, the government delivered a mini-budget. Although this attracted significant public approval, the market largely rejected it. In short, the market has little confidence that the net effect will be growth at a pace and amount that will offset the additional borrowing required from the government.
In addition, this comes at a time when the BoE stated that it will be offloading the GILTS (government borrowing contracts), which means the market will be flooded. Another risk for the UK is that inflation will be embedded and transferred to other costs such as mortgages, as the implied interest rate for Aug 23 is now showing 5.75%.
In the coming week, the market will pay close attention to BoE speakers to see if further tax measures are announced. The BoE Chief Economist is due to speak on Tuesday. Additionally, the Deputy Governor will deliver a speech on Wednesday. The market is keen to understand the BoE’s positioning with speculation of a shock move before the next BoE meeting. Regarding economic data, it is quiet, but the market will focus on future policy action and its impact on the broader economy.
Dollar rally continues
Last week, the most prominent announcement across financial markets saw the US Federal Reserve hike rates by 75 basis points. The announcement and accompanying commentary signalled that a further 125 basis points in rate rises are expected before the end of the year and continues to underpin the dollar rally.
Global stock markets remain largely subdued following the announcements and expectations of higher interest rates in the short term. Meanwhile, global bond yields continue to rise on recession fears. The US dollar was well supported heading into the weekend as PMI figures revealed that the service sector’s business activity rebounded in early September.
The US Dollar Index picked up where it left off last week, surging to its highest level since May 2002, 114.52. In the week ahead, market participants will look to the final release of the US Q2 GDP. The previous GDP reading was revised upwards to a contraction of 0.6% at the second reading versus an initial estimate of a 0.9% contraction. Although the data put the US in a technical recession, performance in Q2 marked an improvement in Q1, when the US economy shrank by 1.9%. Thursday’s third and final reading of Q2 GDP is not expected to alter markets’ view of the US economy significantly. Towards the new of the week, investors will monitor monthly consumer spending releases.
Inflation to continue to rise
The single currency weakened last week following the escalation in rhetoric and action from Russia, which could intensify military action moving forward and prolonged disruption in the supply of natural gas. Adding to the woes of the single currency, economic data was soft. Consumer confidence is declining and economic activity from the manufacturing and service sectors shows a contraction.
The week ahead will focus on ECB Governor Lagarde and inflation data. Governor Lagarde is due to speak today and Wednesday. Markets will wait with bated breath to see if she signposts more aggressive policy action. On Friday, the first reading of consumer inflation is due with it expected to rise from 9.1% to 9.7%.
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