Pound (GBP) Gains Capped by Inflation, Autumn Statement Delivery
GBP/EUR: Up from €1.13 to €1.14
GBP/USD: Up from $1.17 to $1.18
The Pound (GBP) wavered against its peers last week as political and economic factors triggered headwinds. In particular, the UK’s October inflation release and Autumn statement caused volatility.
On Monday, news that British retailers were experiencing a significant drop in profits dented Sterling. Downbeat jobs data compounded losses the following day: unemployment rose to 3.6% in September although average wages rose by more than expected.
Midweek, a greater-than-expected increase in consumer prices sapped support for GBP, as inflation hit 11.1% in the year to October. The news may have inspired increased rate hike bets from the Bank of England (BoE), but it also triggered concerns that the UK’s recession may go deeper predicted.
On Thursday, Chancellor of the Exchequer Jeremy Hunt delivered the Autumn Statement. The Office for National Statistics (ONS) forecast a 7% fall in living standards, further damaging the outlook for the Pound, while Hunt confirmed the economy was in recession.
At the end of the week, Sterling recovered somewhat as retail sales were revealed to have improved beyond expectations in October. It seemed that markets were digesting the positive elements of the Autumn Statement, including an increase in the National Living Wage.
Euro (EUR) Softens as Inflation Exceeds Forecasts
EUR/GBP: Unchanged £0.87
EUR/USD: Unchanged at $1.03
The Euro experienced headwinds last week as global risk aversion drew support away from the single currency and hawkish comments from the European Central Bank jarred with weak economic data.
Industrial production in the bloc improved on Monday by more than expected and on Tuesday the GDP second estimate printed as expected. Nevertheless, a risk-off impulse in the markets capped gains for EUR.
Hawkish rhetoric from ECB President Christine Lagarde buoyed the Euro to some extent, as the central bank head said they expected to hike interest rates further expected to hike interest rates further: Lagarde added it was ‘appropriate that the balance sheet is normalised in a measured and predictable way.’
On the other hand, EUR came under pressure as Eurozone inflation reached double figures. On Thursday, October’s finalised reading printed at 10.6%, fuelling fears that prices rises were becoming entrenched.
At the end of the week, the single currency trended down as investors took a downbeat view of the Eurozone economy. Also weighing on the Euro was strength in the US Dollar (USD), on account of the pair’s strong negative correlation.
US Dollar (USD) Recovers Losses on Hawkish Fedspeak
USD/GBP: Down from £0.85 to £0.84
USD/EUR: Unchanged at €0.96
The US Dollar experienced mixed trading conditions last week on waning inflation, bullish Fedspeak and changeable risk dynamics.
Tuesday’s PPI release weighed upon the ‘Greenback’ as it weakened to 8% in the year to October: producer prices often feed through to consumers in subsequent months.
Subsequently, USD investors are afraid the Federal Reserve will slow its pace of policy tightening. Alleviating these fears somewhat, however, several Fed representatives said that the central bank was committed to maintaining its rate hike trajectory.
San Francisco Fed President Mary Daly said: ‘pausing is off the table right now. It’s not even part of the discussion’, while James Bullard commented that the US central bank must persevere given that tightening so far ‘had only limited effects on observed inflation’.
Further supporting the safe-haven US Dollar on Thursday were geopolitical tensions which attracted safe-haven support. Tailwinds from Wednesday’s retail data may also have inspired USD optimism, as sales increased by 1.3% in October.