Weekly quick take: 23 October 2023

What’s in store this week for currencies and FX markets?

UK activity indicators soften as inflation stays high and impact of higher interest rate asserts

Official UK data last week showed that consumer price inflation has been slow to fall, and unemployment may now be rising. To my mind, the position is likely to get worse before it gets better as households are still facing higher mortgage refinancing costs. This will likely be the case for the next 12 to 18 months based on Bank of England (BoE) data. 

This week also sees several important data releases ahead of 2 November’s BoE Monetary Policy Committee (MPC) meeting. These include delayed Labour Force Survey employment statistics. The Bloomberg consensus forecast is for a sizeable decline in employment. ‘Flash’ Purchasing Managers’ (PMI) surveys are expected (Bloomberg’s consensus) to edge up slightly in October, but to remain mired some way in contractionary territory. 

The outlook for Sterling is a traditional balance between relatively high nominal interest rates and relatively weak growth prospects, in my view. A large and persistent UK current account deficit means that relative growth is potentially more important for Sterling than it is for most major currencies. According to market forecasts collected by Bloomberg, the UK is set to be the weakest performing top 30 economy next year. To me, this suggests the interest rate/growth balance is set to shift to the detriment of Sterling. 

A meaningful turn higher in GBP/USD may need more concrete signs that the US economy is finally slowing, something that would provide confidence that the US Federal Reserve (Fed) will also soon be finished in raising interest rates. Over the past 10 years, GBP/USD has often found support around 1.20. I believe that this may reflect UK financial and physical assets appearing better value to international investors at such exchange rates. 

Geopolitics still in focus

In the past, rising geopolitical tensions have correlated positively with a stronger USD. At times, the same has been true for the EUR given the region runs a current account surplus and money tends to flow home during times of stress. 

The start of this week’s trading has seen global stock markets fall as investors digest what developments in the Middle East may mean for corporate earnings and asset valuations. Outside of geopolitics, while the US Federal Reserve is in blackout, we still get US GDP (Gross Domestic Product) and another set of inflation data. 

According to a survey of economists carried out by Bloomberg, the European Central Bank (ECB) is expected to leave interest rates on hold on Thursday. I’ll be watching for any hints about what “table mountain” looks like from its perspective in the context of weakening activity and softening inflation.