Will the UK’s Autumn Budget Impact Growth and Rate Expectations?

Sterling nudged higher last week as expectation for a November hike ended the week following the previous week of ebbing and flowing. The current probability for a hike in November is now at 62%, according to the CME BoE Watch Tool. Bank of England’s (BoE) Chief Economist Pill said that UK inflation could rise slightly above 5% early next year, and next month’s policy decision is “live” and “finely balanced”. Markets are pricing in a 15 bps rise in Bank rate to 0.25% by November, with four further quarter-point increases next year to 1.25% by the end of 2022. However, Sterling gains have been limited due to the fears of stagflation and the potential knock-on effects. Economic data did little to help paint a mixed picture. Inflation slid 3.2% to 3.1% but being a month in arrears, the market is fresh in the knowledge of the recent petrol crisis. The PMI data unexpectedly rose, suggesting the pace of expansion picked up at the start of Q4 but with shortages being well documented, the market remains sceptical. Adding further colour to this scepticism was highlighted in consumer data as consumer confidence fell for a third month while retail sales also declined again.

Looking to the day week ahead it is quiet in terms of economic data but with interest rate direction and pace high on the market’s agenda, it will keep a close eye on any officials speaking for clues on the direction and timings. On Wednesday, the Autumn Budget and Spending Review will be the main UK focus. A key question is whether economic upgrades and better borrowing figures provide room for Chancellor Sunak to offer significant giveaways. The market will pay particularly close attention to the growth forecast for 2021, government borrowing and mechanisms to support the economy moving forward. It is likely amidst rising inflation the tone will be slightly cautious.

Could US GDP Data Affect Tapering Decisions Next Month?

Last week the US Dollar remained under pressure on speculation that more central banks will push ahead with interest rate hikes ahead of the Federal Reserve (Fed). The by-product was that the dollar fell to its lowest level against the Euro in three weeks. In terms of economic data, it was quiet. The Federal Reserve’s Beige Book report showed that economic activity grew at a modest pace according to most Fed districts. However, several districts reported that growth had slowed down having been restricted by supply chain issues and uncertainty around the Delta variant of COVID-19. However, with inflation and interest rate very in vogue, markets continue to focus on Fed speakers for a clue on policy moving forward. Fed Governor Bowman commented that the Fed is considering a situation where they may see inflation as broader based than expected a few months ago. Fed Governor Waller also stated he would be in favour of an earlier hike if inflation continues to run higher into 2022.

Looking to the week ahead, the market will focus on economic clues on the pace of growth with a blackout from Fed officials ahead of the rate decision next month. On the docket, US Q3 GDP growth is due on Thursday and may not help the Federal Reserve as it is likely to show that the economic growth will have slowed on the annualised basis from 6.7% to 2.6%. However, The Fed’s preferred inflation gauge, the PCE deflator is due on Friday expected to edge up to 4.4%, the highest since 1991. In addition, we have consumer confidence on Tuesday and durable goods on Wednesday making it a packed week for data.

Will the European Central Bank (ECB) Acknowledge Inflation and Potential Hikes to Combat?

Last week was interesting as Polexit started to pick up momentum. Ursula von de Leyen, the President of the European Commission’s, addressed of EU leaders implied that the European Union could not survive if Poland wins its rule-of-law dispute on the basis that EU law superseding state law is the cornerstone of EU treaties. In the meantime, Germany is facing an economic crisis due to soaring fuel prices claimed German business leaders yesterday as they called for emergency tax cuts. The price of diesel hit an all-time high in the European powerhouse this week rising from €1.23 per litre in January to €1.56. If the cost of fuel continues its upward trajectory it could further weigh down German output, potentially providing additional negative risk to the Euro.

The highlight of the week in the Eurozone will be the European Central Bank (ECB) meeting due on Wednesday. It is a given that rates will remain on hold, but the market will be keen to articulate the potential direction and timing of policy moving forward. The markets are determined to stick to their current pricing of 10 bp of ECB tightening within the next 12 months. If this remains the case, the Euro will remain fragile as markets are looking to UK and US for when not if they raise rates in the next 12 months. What will be interesting is what President Lagarde says about prospects of significantly higher inflation in the short term than it predicted only in September. There may be some hints on what might replace the Pandemic Emergency Purchase Programme (PEPP) after next March, but details are expected to be provided at the December meeting.

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