The last week has been quite supportive for Sterling exchange rates with GBPEUR trading between 1.16-1.17 and GBPUSD trading between 1.22-1.23. This has been for various reasons, one of which has been the beginning of the Fed pivot on interest rates and the sudden weakening of the Dollar- this is a move that I think has come a little too early, and I can see the Dollar gaining strength again in the future before we really see a reversal.
Even though it is December and generally we see the markets wind down over the next couple of weeks- this week is pretty jam-packed with data and announcements which will set the tone for 2023, and it will be important to keep an eye on these if you are watching the markets for future transactions.
On Monday we start with GDP figures for the UK, which are expected to show a contraction of -0.4% in the economy, this particular reading is important as it will officially put the UK into a recession (Not a great way to end the year). This data will also come out alongside trade balance, industrial production, and manufacturing production, all to come out negative, so I think this will give Sterling a pretty bleak start to the week.
On Tuesday we will have UK employment data released alongside average earnings, we are expecting slightly better employment data, this could be owed to the retail and hospitality sector, with slightly better average earnings. Later on Tuesday the U.S will release CPI (Inflation) data which is again expected to show a slightly lower number, which proves that the Fed’s actions have been helping stop inflation and may allow for more risk on environment.
On Wednesday the UK will release it’s CPI data, and so far we are expecting the rate to come down a little at 10.9%, however any change to this will be market-moving- the key release on Wednesday will be the Fed’s interest rate decision- there has been a lot of talk about Jerome Powell’s potential pivot on interest rates, and though we are still expecting a hike of 50bps from the Fed, it will be the commentary after the event which will be most important- talk of a pivot means the Dollar will weaken but any comments about keeping rates higher will cause the Dollar to strengthen.
Thursday is an important day as we have both the BoE and ECB expected to hike rates by 50bps each- generally interest rate hikes are supportive for currencies but as Sterling is a high beta currency, a lot of recent movement is really dependent on the U.S Dollar and macro environment. The key issue with Sterling right now is the recession and UK housing market which is already showing a 2% contraction, and I expect this to continue with a higher interest rate environment as this will make it even harder for people to purchase property, especially first time buyers.
All in all, it is set to be a very busy week- if you have a transaction you wish to discuss please don’t hesitate to contact me.