Ben Fletcher
November 8, 2021

UK to Focus on Manufacturing and Industrial Production Data This Week

The Bank of England’s latest interest rate decision last week caused Sterling to give up ground against multiple major currencies. Following weeks of speculation that the central bank would raise interest rates in November the Monetary policy Committee voted 7-2 against a raise. Governor Andrew Bailey, in October, declared that a hike was highly likely causing Sterling to climb to 1.19 against the Euro and 1.385 against the US Dollar, however those lifts have now given up.

The GBP/EUR rate at the time of writing is in the mid 1.16’s matching a 4-week low. For anyone looking to sell Euros this presents a good window of opportunity considering the rate was over 2% higher at the end of October. Whilst the Bank of England decision caused the rate to fall there is a certain element of confidence that a hike will take place in the coming months, whilst it is very unlikely for there to be a change in December, as generally this doesn’t happen, January may be a different story.

The BoE cited that despite inflation being expected to climb to 4-5% levels this was still speculation, and they were prepared to wait and see what happens. The central bank did suggest that they expect there to be hikes next year and they will have to act, but they’re buying themselves slightly more time before jumping in.

This week, Thursday brings several data releases with Gross Domestic Product data for the Quarter along with Manufacturing and Industrial Production. GDP for the last quarter was 5.5% and if that trend continues it could help Sterling make back some of the ground lost last week. Furthermore, manufacturing production data will also be released with an expected reading staying the same as the previous 4.1%.

German Economic Performance Falls Behind Other Leading Economies

Eurozone this week, Germany will take a fairly central focus with a flurry of data releases. Germany, considered the powerhouse of the Bloc, has found their economic performance hasn’t seen the same boost as many of the other leading economies around the world. Based so heavily on industrial manufacturing with wavering orders coming from around the world following Covid, they have struggled to see a lift. There is also evidence that the Mediterranean economies are seeing improved growth at a faster rate than Germany and this could be a rebalancing of performance in the Eurozone.

This week on Tuesday, look out for trade balance data, weighing up the imports versus exports for the country and the ZEW economic survey which measures institutional investors sentiment. Then on Wednesday the latest inflation data for Germany will be released. Inflation is expected to be over 4.5% for October, however the European Central Bank are unlikely to act.

Certainly, the UK and US central banks have given indications of future interest rate hikes, however due to the wide-ranging economics in the single market the chances of changes to the ECB’s economic policy are unlikely. Due to the high debt levels in the Southern European economies raising interest rates would put a major burden on government and consumers alike, hence why the ECB are reluctant to move away from 0% interest rates.  

Ultimately the biggest issue for Germany is raising interest rates is a key tool for battling rising inflation. Over the next few weeks, the German government will continue with their talks to fix a coalition however, so far it is looking tricky. The Social Democrats who won the most votes but not enough for a majority are relying on the Green Party to join them, however the Greens want a major emphasis on climate change. At the moment the country needs some leadership to work out how to improve the economic performance. However, all the time is being spent on who should be in charge, with limited policies able to pass without a sitting Government. This sort of uncertainty could have an impact on the Euro moving forwards.  

US Central Banks Focus on Inflation Following Spikes In Covid-19 Since Lockdowns Eased

The GBP/USD rate fell to the year low last week following the Bank of England decision coupled with some positive news from the Federal Reserve for the US Dollar. Jerome Powell the Chairman of the Federal Reserve last week revealed the central bank will start to wind down their bond buying program. The program has seen the Federal Reserve amass $8.6tn of assets which has essentially kept the US economy flowing. Despite the central bank announcing that they were going to stop eventually buying assets there is still plans for the program to run late in 2022. It is not quite known whether the program will be required to restart once it stops, however for now the central bank is planning to finish their Quantitative Easing program.

This news from the central bank coupled with the Bank of England not raising rates, creating the perfect storm which saw the GBP/USD swoop down to 1.342 at the lowest point, this is 4 cents below the high seen in the middle of October. This trend could well continue with positive economic news coming out of the US and a faltering Bank of England.

On Wednesday this week, the latest inflation data for the US will be released and is expected to be 4% for the Year-on-Year reading. Much like in the UK, inflation is a key focus with central banks having to deal with rising inflation levels following spikes since the end of the Covid lockdowns. If the release is considerably higher than the expected level, then there could be further good news for anyone looking to sell US Dollars. Alternatively, if GDP growth in the US appears to be cooling off, it may add an extra consideration into the Federal Reserve’s plans moving forward.

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